At this point, we’ve all probably experienced the crazy price swings of cryptocurrencies like Bitcoin. To some, it was extremely beneficial. For others, things didn’t fare so well. The main reason that cryptocurrencies in general experience these crazy price swings is because of their high volatility. Don’t get us wrong: traditional assets—like gold or silver—also have their fair share of fluctuating prices. However, newer assets like Bitcoin made names for themselves because of their crazy volatile nature.
Understanding Cryptocurrency volatility:
What is volatility exactly and why are cryptocurrencies like Bitcoin so volatile in nature? Now that people can buy Bitcoin with credit cards and have easy access to it, should you be worried about how volatile it can be?
Basically, volatility refers to the rate at which an asset’s price increases or decreases—meaning that the faster an asset’s price increases or decreases, the more volatile it is. It’s essentially a representation of how much its value moves (in either direction).
The pros and cons of volatility:
Newer assets like Bitcoin are considered to be risker assets because they’re more volatile. At this point, you’re probably wondering: is that a bad thing? From the outside looking in, it definitely seems like something that could intimidate aspiring investors. However, many people see it as a good thing—especially when we see its price spike enormously.
Before you think about getting started with trading or investing in cryptocurrencies like Bitcoin, it’s important to understand both sides of volatility. First, let’s start off with its benefits:
Benefits of Bitcoin volatility:
- Investor’s paradise
One of the greatest benefits of Bitcoin’s volatility is the earning potential that comes alongside it. By now, you’ve probably heard one of the many success stories from those that invested in BTC earlier on. Imagine investing in it back when it was priced at 1 USD and then cashing out when it hit its all-time high of around 64,000 USD—saying that you’d be wealthy would be a massive understatement. Bitcoin’s volatility and its potential returns are enough for anyone to do a double-take and think about putting some money in. Read more about How Social Media is Influencing the Cryptocurrency Ecosystem?
This is true even for those who HODL (hold on for dear life)—a trading strategy that many people use wherein they hold onto their Bitcoin even if the price is experiencing a dip.
- Bitcoin’s limited supply
Bitcoin’s total supply is famously capped at 21 million BTC. With over 90% of that already being mined, it’s possible that we could see a natural rise in its value the more that supply gets lower (law of supply and demand).
- Headline generation
Every time Bitcoin hit a new all-time high (which we’ve seen plenty of times by now), news headlines are created and it gets a little bit more popular. With Satoshi Nakamoto (the pseudonym of Bitcoin’s creator) claiming that it was invented to be a “peer-to-peer electronic cash system” for the world, these headlines could bring us a lot closer to global adoption—something every enthusiast should hope for.
All of that looks good and all, but remember when we said that it’s important to look at both sides? Now, let’s take a look at some of the drawbacks:
Drawbacks of Bitcoin volatility:
No matter what anyone says, it’s impossible to make an accurate prediction of where Bitcoin’s price is going to go—something we can credit to its volatility. More than anyone, this hurts people who are into short-term trading since small intervals can be enough to lose a portion of your money. Even if you’re able to somehow beat the challenge of price unpredictability, you’re going to have to keep your eyes glued to a screen to stay ahead of the curb—which can be exhausting, to say the least.
- Emotional rollercoaster
Not many people know this, but Bitcoin trading can take an incredibly emotional toll on anyone. With price swings all over the place, it’s easy for people to either feel the FOMO (fear of missing out) or extreme FUD (fear, uncertainty, and doubt). If you’re looking to get into this space, make sure you can keep a level head.
Is it a good or bad thing?
At this point, you probably understand that Bitcoin’s volatility is a double-edged sword—it can do both good and bad things. However, the important thing to understand is that it all depends on how you use it.
If you’re the type of person who’s solely getting into this space to make a little bit of money on the side, volatility might hurt you at times. However, if you’re using your trusted Bitcoin wallet to hold funds you’re going to use out in the real world, then it really isn’t going to matter as much.
Ultimately, it’s up to you to decide if volatility is a good or bad thing. As long as you understand both sides of the coin and do your research, you’ll be able to minimize the risks—which is the name of the game when it comes to any kind of investment.