The price of Bitcoin, or any other currency, is said to be volatile when it goes up and down. A high volatility implies that the value changes over a broad range and in a short time. Alternatively, low volatility means prices are relatively stable only fluctuating by small percentages.
Why is Bitcoin volatile?
The volatility of bitcoin arises from:
- A limited amount of coins (14 million today) against increasing demand by speculators, investors, and companies.
- Uncertainty over its prospects in the future as well as day to day events. Bitcoin is especially sensitive to events since it is still young and evolving.
- Current difficulties in purchasing bitcoins with national currencies/dollar. This creates a liquidity problem out of a shallow market.
While volatility has been sighted as an impediment to mass adoption of bitcoin, it does present opportunities for those who know how to tap into it.
How is Bitcoin volatility a good thing?
- Profitable in trading
Volatility is an opportunity for making profits when prices are going up or down. Traders do this by buying low and selling high. In a bear market, they make money by selling high and buying low. When the price fluctuates wildly in short periods, you can do this repeatedly and make good returns.
- A learning and practicing opportunity
You can learn how to trade and understand price action in a relatively short time with bitcoin compared to other markets. Due to its volatility, a lot of market activity occurs within short periods. This is a huge advantage especially if you are just getting started with trading in general. Because of the fast fluctuations, you can observe and practice price patterns such as triangles, Elliott wave cycles, divergences and general technical analysis in a short term.
Traders who are excellent now have experienced many bear, bull, and flat market trends in a short period. For instance, since 2011, there have been three price bubble peaks, each of them higher than previous ones – $32, $236 $1169.
- Discounted price valuation
Price fluctuations are an opportunity for you to get in early while others stay away citing it as a risk. Just like venture capitalists make early investments in young companies with great promise, so will you. If Facebook and Google were publicly traded in the early days, investors would have experienced similar volatility. It is a function of uncertainty and expectation.
Bitcoin has great potential in a future where technology is ubiquitous. Investing in bitcoins today is betting on the future of the cryptocurrency and network. Prices now are discounted because of its uncertainty. For you, volatility presents an opportunity to accumulate on the price changes.