Why is Bitcoin so volatile?
Bitcoin is known for its strong price fluctuations. One of the main criticisms of the digital asset is the high volatility of its price. Therefore, price volatility can be a deterrent, especially for newcomers.
High volatility means that the price of an asset is very likely to fluctuate significantly within a short period of time, while low volatility indicates that the price of an asset remains relatively stable.
There are several methods to determine volatility. One way is to calculate historical volatility. This is done by looking at the price of an asset over a period of time in the past and determining the deviations from the average value to determine the historical volatility.
Price movements are a normal part of global financial markets and become particularly challenging for investors when markets fall dramatically.
When comparing the volatility of different asset classes, we find that stocks, for example, generally fluctuate more than bonds. Within the bond class, credit quality bonds generally fluctuate less than high yield bonds.
Bitcoin's high volatility can be explained by several factors, one of the most important being that Bitcoin as an asset class is still comparatively small and young. Unlike established forms of investment such as gold, stocks, bonds and real estate, Bitcoin has not yet been comprehensively understood by many investors.
Many are only gradually beginning to get to grips with Bitcoin. In addition, regulators have yet to find appropriate frameworks to integrate Bitcoin into our financial system.
In the Bitcoin community, the dollar-cost-averaging method (DCA) and long-term holding (hodln) are popular investment strategies.
The DCA method involves investing in a specific asset on a regular basis (e.g. weekly or monthly) with a standing order, and short-term fluctuations do not play a major role. This is because the only thing that counts in this investment strategy is the long-term trend, which remains intact despite the high fluctuations in the bitcoin price.
Bitcoin's volatility has decreased due to its increasing acceptance in society and the financial industry, as well as increased user confidence due to Bitcoin's history. The market capitalization of an asset also plays an important role in volatility in this regard.
These developments have contributed to the fact that Bitcoin is now considered a recognized asset class and is included by more and more people in their portfolios.
Spread the knowledge
If you liked this content, make sure to share it with your friends. If you think there's something missing here, send us a quick message.