What is Volatility?
Volatility is the variance of fluctuations in the average price of an investment. Bitcoin has risen by more than 50 times in the last seven years and therefore has a greater variance in the average price than traditional financial instruments such as bonds or stocks. Investments that rise or fall sharply have high volatility.
Volatility is often used as one of the main indicators of risk.
Why is Bitcoin volatile?
There are many factors that contribute to bitcoin's volatility. Important reasons for this are that bitcoin is still a relatively small and young asset class and that bitcoin as a new technology, in contrast to gold, bonds and real estate, is not yet fundamentally understood by many investors. Some investors are just starting to look into bitcoin. In addition, regulators must first find a framework for how bitcoin fits into our world.
The price of bitcoin is driven by expectations of future value, and the actions taken today by investors and politicians change these expectations and, as a result, the price.
The market for bitcoin is still small and immature, which has repeatedly led to large price fluctuations in the past. The smaller a market is, the higher volatility can occur, as there are fewer market participants to meet demand.
In mature markets, market participants can use derivatives (special financial products) to protect themselves against strong fluctuations, which is why these generally occur less frequently and strongly. Compared to stocks or bonds, the market for bitcoin derivatives is young and the volume traded is low.
Bitcoin is also an asset that can be traded around the clock, 365 days a year. In contrast to traditional financial instruments, price drops cannot result in trade interruptions or even complete trading failures.
Conclusion
Although bitcoin's volatility is challenging, the long-term upward trend of cryptocurrency cannot be ignored. It's important to consider the various factors that contribute to volatility and understand their impact on the market. With time and increasing acceptance of bitcoin, volatility could decrease and markets could become more stable.
One of the best and most proven ways to deal with bitcoin's volatility is to use a savings plan. In this way, you benefit from the average cost effect and do not run the risk of making emotional decisions due to price increases or price losses.
21bitcoin offers you a super easy way to set up a recurring savings plan with just a few taps.
Stay humble, stack Sats!
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