Bitcoin's Volatility and Other Concerns

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Since the beginning of this year, the popularity of top cryptocurrencies has exploded. As their supply is limited, prices moved sharply upward allowing investors to lock in some gains.

Companies like Tesla and MicroStrategy invested in bitcoin, further supporting the cryptocurrency’s upward movement. Others, like well-known art gallery Sotheby’s, started accepting cryptocurrencies as a payment method.

While Tesla, later on, stepped back on its decision to accept bitcoin payments over environmental concerns, some companies including cryptocurrency casinos started accepting payments and never looked back. This means you can deposit into your online gambling accounts and play with crypto.

Crypto Market Volatility

Most cryptocurrency enthusiasts understand the crypto world differs from traditional financial markets. While there isn’t a volatility index for all cryptoassets there is one for bitcoin that is used to measure the entire market’s volatility.

Looking at price action it's clear how volatile cryptoassets can really be. In 2016, the price of Bitcoin rose 125% and in 2017 it rose more than 2,000%. After a year-long bear market and subsequent recovery, in 2021 Bitcoin continued to move upward to hit a new all-time high, more than tripling the highest price it achieved in 2017.

Cryptocurrencies don’t just move up, however, as after BTC hit its near $20,000 all-time high in late 2017, it proceeded to drop to a $3,200 low by December 2018 during a year-long bear market. 

Short-term Factors Heavily Affect Prices

New event announcements from large companies and governments can scare cryptocurrency investors. Elon Musk’s tweets or China’s crackdown on cryptocurrencies led to significant price drops, even though several analysts saw both as positive for the space.

On one hand, Musk calling for the use of greener energy in bitcoin mining improves sustainability, while a move away from China further helps decentralized the cryptocurrency.

Concerns Surrounding Bitcoin’s Perceived Value

Bitcoin is often described as a digital version of gold, but its volatility stops it from being as widely accepted as the precious metal. Bitcoin has a 21 million supply cap which means it isn’t subject to inflation.

Its perceived value, however, is based on the cryptocurrency being used as a store of value, but its volatility heavily influences this perception. A store of value should not see its price drop over 50% in a 30-day period, as BTC did recently.

Legitimacy

In order to be used as a medium of exchange, an economical tool must be approved by economical actors. The instances where the companies accept bitcoin as a payment method were good sig, but some like Tesla ultimately backed off. This for example, again shows that the trust for Bitcoin is not mature enough.

In order to be a medium of exchange, the number of service or goods providers must increase so that the legitimacy and validity of cryptocurrencies increases. Otherwise, cryptocurrencies are more likely going to always be seen as an investment tool and a get-rich-quick scheme.

Unequal Distribution

Large cryptocurrency holders can heavily influence the market. Tesla has for example bought $1.5 billion worth of bitcoin earlier this year, which means it holds a significant amount.

If the electric car maker were to decide to dump all of its coins on the market, it could trigger a crash, especially during periods of low volumes. A significant dip in the price of bitcoin could see margin positions get liquidated, adding additional selling pressure to an already thin market. 

How to Protect Yourself

Since the market is highly volatile and can potentially be affected by large investors, the first thing an investor should consider is that they are unable to predict the future of this nascent space, and as such their portfolio should not solely rely on cryptocurrencies.

In order to avoid unnecessary risks, investors should use well-known trading platforms such as Coinbase and Binance, while avoiding little-known cryptocurrencies that may end up being scams.

A balanced portfolio with some exposure to stablecoins will also help you avoid suffering too much from the crypto space’s volatility. Of course, this reduced risk will also lead to smaller gains or losses.

Remember that at the end of the day you need to do your own research before investing one cent of your money in any market.

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