Cryptocurrencies have attracted a lot of attention since their creation, and this, in part, can explain huge price swings in the most popular of them. For instance, Bitcoin's price has proved to be extremely volatile during its ten years of history. In 2017 the cost of one Bitcoin rose by more than 20 times, and as soon as early 2018, Bitcoin lost 70% of its price. It wasn't the first time that Bitcoin fluctuations draw the interest of investors –– similar movements occurred several times before and after.
But in three months from October 2017 to January 2018, the volatility reached unprecedented levels. Why does Bitcoin price change so quickly? Many factors drive Bitcoin price fluctuations, and you can see a list of some of them below:
News plays a significant role in establishing a Bitcoin price. Positive ones excite investor interest and cause traders to buy Bitcoin, pushing the price higher. Negative news results in a sharp drop in prices.
One of the great examples is the announcement of the exchange operator CME Group Inc. about its plans to add Bitcoin futures in 2017. After that, another major exchange Coinbase added 100,000 users in a single day. Or the disappearance of nearly $72 million worth of Bitcoins from Bitfinex in August 2016 caused a 20% price drop.
It is worth noting that news can have a double effect on volatility. Though the bad news decreases the overall supply of Bitcoin, it can also cause the rise of the value due to scarcity. And overriding this lift will, in its turn, have a negative effect on the cycle that follows.
If the sentiment around Bitcoin is positive, it will result in increased demand and following upsurge of a price. And as price gains transform into the media hype, price appreciates even further.
But as soon as sentiment changes, "bubble" bursts, and traders start selling their assets, causing increased media coverage and increased supply.
Bitcoin also tends to be more volatile. Bitcoin developers reveal security vulnerabilities to the public to produce robust security fixes. It happens because Bitcoin has much in common with open-source software. They are built using the same fundamental principle: a copy of the source code is available for everybody to examine.
This concept allows the community to voice concerns and to come to a consensus about modifications. But it also causes highly publicized debate regarding the Bitcoin platform and its security issues that can affect the valuation of the cryptocurrency.
Of course, these are only some of the factors that affect the volatility of Bitcoin's price fluctuations. Others are low liquidity, small market size, and an immature regulatory environment. Some observers emphasize the role that speculation plays, and they are right.