In 2017, the price of Bitcoin went from $750 in January to a jaw-dropping $18,000 by December. The following February, the price dropped to $6,300 but held steady through most of 2018, before declining again, bottoming out a year later at $3,400. However, since the low of February of 2019, Bitcoin has been on a rapid ascent, and is approaching $10,000 as of early summer 2019.
What gives? How can a single asset value rise and fall so spectacularly? Here are a few of the reasons why Bitcoin has been especially susceptible to volatility.
- Speculative investment. When large groups of investors look for a fast way to make money by buying and selling assets quickly, it affects public impressions of that asset, causing prices to fluctuate wildly.
- Lack of understanding of the technology. No one disputes the value of precious metals in a meaningful way – we understand why gold is valued though we may not value it to the extent that the market indicates. Cryptocurrency, on the other hand, remains a mystery to a substantial portion of the global population, and because the value is perceived rather than actual, it is extremely susceptible to changes in public mood.
- Security breaches. High-profile security crypto breaches – and the subsequent media coverage – have caused significant damage to Bitcoin and altcoin value.
- Lack of regulation. Although the "wild west" nature of the cryptocurrency landscape contributes significantly to its appeal for a great many users and investors, it does lead to significant dips in value. Because it is not backed by any government nor subject to major regulations, public confidence in cryptocurrency can rise and diminish very quickly.
While these factors have influenced the lack of stability in cryptocurrency, most of them have been successfully addressed, making Bitcoin and altcoin markedly less susceptible to wild value swings. Firstly, the technology is becoming far more secure in terms of crypto storage permeability, making cracking increasingly difficult. Secondly, with more merchants adopting cryptocurrency as a method of payment, states are increasingly levying stronger regulations in order to ensure a measure of economic stability. Finally, as investors become more informed and the technology improves and becomes better understood, the investor pool will mature, resulting in reduced wild speculation. Not only will these factors increase overall stability, they will cause values to go up steadily, albeit more slowly than previously.
Although Bitcoin highs approaching $20,000 may not be seen again in the near future, all signs indicate that it is becoming a smart and stable investment.
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*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, accounting, or investment advice.