Bitcoin is the essential cryptocurrency, a powerful presence that has inspired imitators and competitors and shaped financial markets with its many rises and falls since its inception in 2009. It’s incredibly volatile, with prices surging and dropping often hour-by-hour, not moment-to-moment, which is one of its most distinguishing features. It’s long been the case that tracking the crypto market requires keeping an eye on the value of Bitcoin (BTC), but it’s gotten bigger than that. Bitcoin is increasingly an indicator of other investment markets, so even those outside the crypto space are keeping track of the BTC to USD conversion rate.
If you’re a serious investor, or curious about beginning to invest, then it’s time to learn how BTC works, what drives its volatile movement, and the impacts that these changes can have.
What Drives Fluctuations in BTC Value?
Like every market that investors pour their wealth and effort into, the crypto market–and BTC in particular–is driven by supply and demand. BTC has a supply cap of 21 million coins, meaning it’s driven by a deflationary model that requires coins to be removed from circulation on a somewhat regular basis. As a result, the supply of the coin rises and falls in a (somewhat) predictable cycle. When supply dwindles, value tends to increase, naturally driving a rise in demand.
Market sentiment plays a significant factor as well, as with any market. The crypto space is highly reactive. Perhaps more than any other speculative market, cryptocurrencies are influenced by news reports, trends on social media, and sentiments expressed by influential figures in media or politics. A single social media post or news story could cause a boom or bust in BTC value within hours. Thanks to the hawk-like hunting instinct of crypto investors who like to “Buy the dip,” this can trigger a reactionary boom just as often as it triggers a fearful selloff.
Another thing to keep an eye on is regulatory developments, as the various regulatory authorities governing the global market have yet to fully decide on policies regarding cryptocurrencies. Policies change, and sometimes conflict and small changes can alter market sentiment quickly. Recently, BTC has come to be seen as a stable store of value for some, meaning that instability in fiat currencies or other stores of wealth might trigger crypto buy-ups from those likely to be affected.
Excitement or Caution: Investor Reactions to BTC Volatility
BTC investors all bring different strategies to the market. One of the major defining factors in a person’s approach is their appetite for risk. The volatile swings of BTC value encourage short-term traders who can buy and sell rapidly, often multiple times per day. It’s the kind of high-risk trading that has become a cultural sticking point in the crypto market, especially surrounding Bitcoin. Those with a high tolerance for risk often celebrate placing large, dangerous “Bets” in response to moment-to-moment variations. However, opinions do vary on the potential of BTC in the short term.
Another approach is to play the long-term game, much like investors often do in stocks or mutual funds, betting that long-term gains will outmatch the potential losses of high-risk swing trading. Sometimes called “hodlers” in crypto lingo, this strategy reflects a significant optimism in Bitcoin’s potential. These investors look at the longer history of BTC, which has seen a significant resurgence after historic crashes, as well as broadening institutional and regulatory acceptance, and choose to believe that these trends will continue.
Institutional investors are a relatively new dynamic in the space, which long-term holders would point to as further evidence of continuing success. Representing financial institutions that resemble those more likely to invest in more traditional markets, institutional investment is seen by some in the crypto space as a sign that stability will increase over time.
The outcome of these different factors is a unique culture of varied investment practices. Retail investors, seeking excitement and sometimes driven by the “Fear of Missing Out” (FOMO), can create incredible surges of value. These dramatic moments inspire long-term holders but are just as likely to be followed by busts as swing traders reach the limits of their risk tolerance and sell-off. Meanwhile, institutions calmly calculate predictions for coming years, creating a new, more consistent dynamic that BTC had often lacked.
A Closer Look at BTC Impacts
The fluctuations in BTC value can have consequences well beyond the crypto sphere, touching USD and other fiat markets, other speculative investment markets, and broader financial ecosystems. BTC’s high volatility, which can still make institutions reluctant to adopt it as an exchange medium and leave consumers unsure if it could be used as a currency for the purpose of transactions, remains one of the main drivers of opportunity for traders, investors, and speculators of all kinds.
The larger impacts of BTC’s value may be most easily seen in tech stocks. The progress of technology, particularly that involving the blockchain, machine learning, advanced algorithms, and other new ideas that are driving next-gen fintech, has been closely tied to the success of cryptocurrency. The correlation between increased investment in BTC and increases in the value of tech stocks has been reported and demonstrated. It has been tied to the activity of institutional investors, perhaps because of the added stability this brings to the speculative currency.
In part, this is because so many of these new technological tools have been put to work in the arena of crypto investment or are a direct response to the demands of BTC’s incredible volatility. In one example, the need of swing traders to respond to fast-paced changes has driven the development of AI bots with nigh instantaneous response times; sometimes minute-to-minute trades are too slow, and moment-to-moment, instant-to-instant trades are the deciding factor between incredible gains or seismic losses. In another, the breadth of data caused by the frequent changes and the fast-paced buying and selling has necessitated the development of models that can process information more quickly, presenting market models so that swing traders can make quicker, better-informed decisions.
Increased investment in BTC has naturally led to increased development in tools like these, creating new opportunities to develop more advanced software solutions. This can be said to have influenced the entire fintech sector.
Historic and Future Influence
BTC’s volatility has become more than a defining characteristic of the crypto market. At this point, it’s become a feature of the global financial market, and it’s turned into an important driving factor for the improvement of fintech. While the price swings do present challenges, necessitating investors to track both BTC values and USD or other fiat values alongside it, they also create opportunities for daring investors. Fluctuations in Bitcoin’s market price are an indicator of investor sentiment and the state of expansive markets, heavily influenced by the world around them but also significantly influencing them in turn. Whether it stabilizes or remains volatile in the long term, its impact–both historic and going forward–will remain undeniable.
