After the 2008 market crash exposed the vulnerabilities and corruption of the financial system, there were people dreaming of an alternative. Some turned these dreams into reality – that’s how Bitcoin came to be. A fully digital currency that would allow for anonymous value transfers, unbound to central banking, a pirate of sorts, drifting away from conventional currencies.
Now, a decade after this cryptocurrency has been launched, it’s time for a small assessment of just how stable Bitcoin is, what affects it and why does it fluctuate as much as it does. We’re also going to talk about what exactly can you do about the nature of BTC and how can you make sure you’re able to make the most out of it.
It’s just… never stable
When you look at Bitcoin’s price chart, you will see a lot of ups and downs, or maybe, to be more dramatic (and accurate!) – Mount Everests and Mariana Trenches. The value of this cryptocurrency is never in place. And while the same can be said about every financial asset – from gold, to money – things get extreme in case of Bitcoin.
The first several years of Bitcoin’s existence, from 2009, up until 2017, its price was at a very low level, as compared to the current times. In fact, it would rarely breach the $500 cap. Yet, when you look at the micro level, what seems like pretty much a straight line with a trend or a slight growth, is actually filled with sudden dips and increases. The only thing is, they used to occur on a much smaller scale.
In 2017, the value of Bitcoin started to skyrocket, reaching $1.500 – $1.600 in May that year. The craze continued and the cryptocurrency peaked at $19.783 per piece in December 2017. That’s an insane growth, right? Well, the come down was just as drastic, with BTC dropping to just $3.300 – $3.600 between November 2018 and January 2019. Since then, it surged again, reaching up to $13.000 around July 2019. Right now, this sudden spike is slowly dying off (the current value is $10.500), and while the drop is not as drastic as the one that occured around a year and a half ago, it can still be felt. It also speaks volumes of just how unstable Bitcoin is.
Okay, but… why is it so unstable?
The very initial idea that lies at the very heart of Bitcoin, is its secrecy. It’s supposed to hide the buyer and seller’s identities, so that only the amount of Bitcoin transferred is recorded. While this idea has found plenty of supporters in the age of online surveillance and visibility of transactions, it has a limited use.
Ask yourself a question: how many things do you purchase on a daily basis? How many of those you’d like nobody to find out about? Certainly not your groceries (don’t worry, we won’t judge you for that massive pack of cookies!). Or a car payment, an engagement ring, a new houseplant – we could go on and on for ages! These are everyday items, things that won’t get you on an FBI watch list – hiding these expenditures is not exactly the first thing that comes to your mind.
What is more, we need to pay attention to the nature of our financial system. It is built around the currencies we are accustomed to – coins, banknotes, and recently, payment cards. You go to the store, pick your products and pay. Same goes for online shops – the process is simple. You enter your card details and voila, all done!
Bitcoin is another story. There’s only so many things you can buy with it, whether because few places accept BTC, or because it’s far more convenient to use ‘normal’ money. It has actually gotten some bad fame for being a go-to currency for drug dealers and criminals.
Right now, it’s being used less as a means of payment, but rather as an investment. The surge in Bitcoin’s price in 2017 came in a moment when people realized the potential of the cryptocurrency and started buying loads with hopes of a good return. It’s kind of like gold, only a digital one.
For now, Bitcoin remains an alternative
Funnily enough, Bitcoin has a tendency to be used as money in countries, which, whether because of internal turmoils or a foreign involvement, have become destabilized to the point that their currencies are ridden with hyperinflation. That’s the case with Venezuela and Zimbabwe, where BTC markets are some of the biggest on their respective continents. The increased usage of cryptocurrencies is a response to a decreasing liquidity of conventional money.
Venezuela and Zimbabwe are, however, exceptions, and, in most cases, usage of Bitcoin as means of payment is limited to the infamous Dark Web. Its applications as a currency are, for now, limited to very specific cases.
What affects Bitcoin’s price
Bitcoin is worth only as much as there are people interested in it. The buyers and sellers, as well as startups and conferences devoted to it, are all factors influencing its price. It operates entirely differently than conventional money. Instead of a complex system of supply/demand, inflation/deflation, national banks, bailouts, etc., it’s the word of mouth as well as circulating opinions that has got the most to say when it comes to BTC.
Given that the supply of Bitcoin is limited, the more people talk about it, or want to purchase it, the bigger the price is going to be. Add its viral potential and novelty, and you’ve got a recipe for a price spike. But what factors, apart from the price, cause people to decide to sell or buy Bitcoin?
To put it simply – the reaction of powerful entities to Bitcoin is what makes all the difference. These entities, such as governments or media, are capable of influencing the public opinion and either getting more people into BTC or against it. The 2017 price soar happened, because, the Japanese government has accepted it as an official method of payment. What is more, Russian Finance Deputy Minister has said that he might consider legalizing cryptocurrencies to use them to combat money laundering. People started trusting Bitcoin and began to buy it. Also, successful investors, Jeremy Liew and Peter Smith, have predicted the surge of Bitcoin.
The sudden drop in December 2017, after several months of growth, has been caused by just how unsustainable it was in the first place. To add to that, Bitcoin is very susceptible to speculations and fake or untrue pieces of information. Given how small the market is (its value is estimated at $60 billion, compared to $80 trillion of the global financial market) and the fact that 40% of Bitcoin is owned by around 1000 people, every person backing out or entering the market, makes an impact on the price. Especially if they’re big players with a massive capital.
We think it’s quite curious to see how little is needed in order to massively shift the price of Bitcoin. What, in case of conventional money, wouldn’t even make a tiny dent, is absolutely game changing when it comes to cryptocurrency. That, of course, puts a lot of responsibility on BTC owners, to tend to their money. This brings us to the last point…
What can you do about it
Diversify your portfolio
Bitcoin is a mixed bag – it can make you rich, but it can also get you bankrupt. Both can happen within one week. It’s a risky and nerve-wracking business that’s definitely not for everyone. If you don’t feel like spending your days glued to a value chart, hoping for a price chart, then there are many other things you can invest in, that offer much more stability.
Take precious metals, for example. Gold and silver, two of the most popular investment metals, have been ‘in’ for several thousand years. It has only been since the second half of the 20th century, however, that gold and silver took a more prominent role as investment goods, as opposed to being mainly a material for minting money. Right now, they are widely considered to be a very safe and stable way to store wealth that is not expected to lose its value anytime soon.
This is not to say you should resign from Bitcoin. However, it’s never a good idea to put all of your eggs into one basket. Especially when it comes to investing. We would like to advise you to diversify your portfolio so that it includes goods that bring about long-term gain, as well as some short-term ones. Let’s talk more about the second type…
Bitcoin is a perfect example of goods that work best as a short-term investment. That means, you don’t keep it for years and turn it into cash when you need it, knowing that the price is still going to be good. Rather, it means buying when the price is low and selling, as soon as it goes up. When it comes to BTC, that can mean a couple of months.
If you’ve decided to invest in Bitcoin, and given how unpredictable Bitcoin is, we would like to advise you to check the price charts daily. Cryptocurrency prices change rapidly, and for reasons of a much lesser gravity than in case of precious metals. It certainly is a risky business, and it’s only up to you whether or not you want to get engaged.
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