Understanding Bitcoin Volatility: Key Factors & Market Impact

Bitcoin is a fully decentralized peer-to-peer payment system, notorious for its volatility. The crypto’s volatility doesn’t occur in isolation. In fact, it determines the course of the crypto market. Most cryptocurrencies are impacted by Bitcoin’s fluctuating prices.
Understanding the determinants that affect Bitcoin's volatility will help you gauge the developments and tendencies in the crypto market better. Here’s a look at some of the key factors.
Investment attractiveness

• Attractiveness is a more dominating variable than demand and supply in determining Bitcoin's price, according to Ladislav Kristoufek's analysis in his research paper, What are the main drivers of Bitcoin price, published in 2015.
  
• Attractiveness could be seen as the good reputation and investment appeal of Bitcoin. It is mainly shaped by media influence and political changes .
  
• Media Influence : Positive news published by the media about Bitcoin plays an extremely important role in garnering potential investors and increasing the consumer base for Bitcoin, especially when the the number of altcoins is growing.

• Political changes: Political turmoils and economic crises often lead to increased acceptance of cryptocurrencies among the masses.
  
  
  • People tend to depend entirely or heavily on cryptocurrency because of its bankless transactions and future investment prospects.
    
  • Afghanistan, Nigeria, Kenya, Vietnam, Argentina are some of the countries where cryptocurrency usage is booming for sending diaspora remittances and alleviating economic distress.
    
  • Political turbulence like change of regime, hyperinflation, high poverty, unemployment, absence of financial services in these countries drove people to the adoption of Bitcoins and altcoins.
    

Supply and demand

• To understand Bitcoin’s supply quotient, it's important to remember that Bitcoin’s total stock is finite and 90 percent of it has already been mined.

• Price of Bitcoin decreases with increased stock. The stock of Bitcoins is limited, but its supply in the market can be increased by mining or solving complex algorithms.

• Demand, however, has a greater impact on Bitcoin's price than supply, as bitcoins have a predetermined stock of 21 million coins. The price of Bitcoin rises with the increased demand created by more investors competing to procure the cryptocurrency. Potentially, demand for the crypto is bound to surge, and consequently price too is expected to rise in the future despite the hiccups.
  

Mining difficulty or Hash rates

• The mining difficulty of Bitcoin or hash rate does not have any direct relation with Bitcoin prices, but it does cause a marginal impact according to Xin Li and Chong Alex Wang's analysis in their 2017 research paper 'The Technology and Economic Determinants of Cryptocurrency Exchange Rates’.
  
• The increased hashrate actually means increased investors spending on mining hardware and electricity costs, which indirectly implies increase in price of the Bitcoin.
  

Policy Changes By Governments

• Government policies and regulations have have a direct impact on Bitcoin prices s.
  
• Stringent sanctions and measures have had a negative impact on Bitcoin prices in the past due to apprehensions among investors. The crackdown of China on Bitcoin in 2017 that drastically reduced the Bitcoin prices is one such example.
  

Adaptability of the Bitcoin users to new updates

• The ease and adaptability of the Bitcoin community to new updates is another factor in increasing the popularity of Bitcoin, and thereby the prices.
  
• Decisions made by bitcoin users to not update to the newer version causes hard fork and lead to two versions and two sets of rules.
  
• Bitcoin Cash is the result of such a fork in 2017.
  

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