Why does bitcoin fluctuate? A lot of it has to do with the uncertainty of bitcoin as a viable form of currency or store of value. Sprinkle in questions about how bitcoin is currently being used and unethical trading practices by cryptocurrency exchanges, and you have a recipe for wild price swings. While bitcoin traders don’t mind this volatility, it has generated a host of non-believers who see bitcoin as nothing more than a speculative investment. Yet, some public figures have come out of the woodwork to vocalize their change of opinion on the cryptocurrency, showing a trend toward positive sentiment of the cryptocurrency.
Is bitcoin volatility as big of a concern as it appears? Or, is too much being made of its short-term price fluctuations?
Bitcoin volatility stems from its uncertain future as a digital currency. When looking at the short term, bitcoin price fluctuation is concerning. Prices can rise and fall upwards of 10% in any given day on the backs of rumors and unsubstantiated news.
When examined objectively, bitcoin does prove to be an improvement over fiat currency and gold, but it still requires mass adoption to become a viable currency and/or store-of-value. Bitcoin might be the best invention since sliced bread, but if it isn’t used on a global scale, it won’t ever be a true alternative to traditional currencies for the masses. After all, much of the general public still has the question what is cryptocurrency
One advantage bitcoin does have on its competitors is what is known as network effects. A network effect occurs when a good or service increases in value as a direct result of the number of people using that good or service. Think back to when the Internet first started. If you were one of the first people to ever use this new technology, it was probably a novel idea, but in reality, it didn’t provide much value. There was no one you could send email, and nothing more than a few web pages to browse. As the number of people who used the Internet grew, more web pages were created, and more functionality added, increasing its overall value. Fast forward to today and the Internet has skyrocketed in value because of the number of people using the platform.
Bitcoin will succeed or fail based on these same network effects. If people trust bitcoin and choose to transact using it, the currency will hold substantial value, but if not, it will ultimately falter. When more people begin to use bitcoin on a regular basis, it will increase its value and stabilize as a currency. But until then, bitcoin price fluctuation will remain the norm.