Why The Price of Bitcoin and Ethereum Are (Still) Volatile
Many see Bitcoin and Ethereum not only as future-friendly and convenient forms of payment, but as wise long-term investments. The number of people who use digital currencies is steadily increasing, and excitement has grown around the possibility that the price of Bitcoin and other virtual monies will soar in coming years.
Indeed, the conditions are in place for Bitcoin to play an impactful role in the global economy: mobile device adoption, which facilitates virtual currency transfer, continues to rise across the world. In regions where many people have access to a smartphone but not to banking services, the ability to store and send money with a phone is extremely powerful. A great example of this is the digital finance platform M-Pesa, which was pioneered in Kenya and Tanzania and has helped grow the Bitcoin market in Africa and the Middle East.
Globalization has led many to take an interest in financial services that are agnostic to national borders, including digital currencies. Bitcoin and Ethereum allow for more seamless, time and cost-efficient international money transfer. They are also perceived by some as a trustworthy alternative to localized currencies in regions with political conflict.
On a more general note, as older business and finance processes continue to digitize, a currency that is native to the digital world simply makes sense. The trends that are making virtual currency more popular appear not only to have lasting power, but to be a central aspect of future communications and finance. By this logic, it makes a lot of sense to buy, sell, and invest in the e-currency ecosystem.
But this is not without downsides. A continuing issue is that the price of Bitcoin, Ethereum and similar tokens has always been subject to a much wider range of price fluctuation, or volatility, than traditional currencies. This has stayed true as the concept seems more and more normal. Wide price fluctuation gives both investors and everyday digital cash users reasons to be skeptical about this innovation, even in the face of staggering potential payoffs.
Bitcoin’s price is so volatile because of speculation. While it’s possible to buy physical goods with Bitcoin in some places, the large majority of Bitcoin transactions are still investment based. As such, people buy and sell Bitcoins like they would any other investment. This buy-sell cycle is what makes Bitcoin’s price so volatile.
There’s no way to definitively measure the chilling impact of volatility on digital currency adoption. But it is possible to help this situation even out in the long term. One way to encourage the stability of Bitcoin, etc., is simply by learning about why they’ve been so unsteady. Understanding this can lead individuals to make more informed choices about how they buy and spend digital cash, which is better for everyone.
Booms, Panics, and Bubbles in Cryptocurrency
The first issue to address is public perception. Image is of utmost concern in all forms of risk-based financial decisions, and is perhaps the biggest single reason for the instability of digital currency. When large numbers of investors act on negative press or industry skepticism about their holdings, this takes a toll on their value. Regardless of the extent to which this mistrust is based in reality, a poor or rapidly changing image can decrease or destabilize asset prices significantly. This can in turn lead to a vicious downward spiral — a selling panic. Thus, perception and image management is a critical component to supporting new ventures, even if the “real” risk or functionality of an asset like BTC is not nearly so ambiguous.
Because digital currency is not only a very new concept, but one that requires a bit of technical knowledge to grasp, there’s a lot of anxiety about bad decision making in this field. Many savvy financiers who own and use Bitcoin remain unsure of how it gets its intrinsic value, among other features that make Bitcoin work. For example, BTC consumers don’t necessarily have to know that the design of its protocol has limited coin production to a fixed number — that would be 21 million — or that cryptocurrency mining technically builds a stronger and more trustworthy network. Regulatory and growth-encouraging economic functions are still widely understood to be the prerogative not of technology, but humans who work in governance and policy. The irony is that blockchain technology, which powers Bitcoin and Ethereum, is often touted as “trustless” because it is so resistant to human tamper. The automation that helps make it more secure also makes many people uneasy.
The Impact of Bad Press
The mystery that surrounds digital currency means that bad press has an even stronger capacity to hurt its price than it does on other investments. On the other hand, the novelty and intrigue of the technology often means positive hype can lead to more quickly rising prices. Bold investors eager to dip their toe into an exciting new trend have plenty to be interested in here. Any perception shift that could cause the value of more well-established assets to rise or fall will likely manifest as an even larger swing in the price of BTC, Ethereum, and so on.
As electronic currency becomes more widely accepted, this may change. But perception is not the only reason digital currency is volatile. As noted, one of the most attractive features of virtual currency is its inherent suitability to the global market. Digital nativity means that international transactions cost much less in terms of overhead. Indeed, virtual currency has helped us envision a world where sending and receiving money is as easy as sending and receiving email. But as businesses and individuals all over the planet begin to embrace this as an option, national governments have had to grapple separately with a wide range of issues regarding its regulation and role in their respective economies.
Effects of Governments and Politics on Price
Just as with perception and hype, the ways that governments acknowledge digital currency can urge its price in either direction. On one hand, legitimation via government recognition is positive news for the digital currency community. It means that institutional actors understand that this trend is here to last, and are working on policies aimed at gaining the most social benefit from digital money. This offers reassurance to those with traditional views toward financial systems, and could make for a smoother transition to an economy in which digital currencies play a more prominent role in international trade.
On the other hand, those who see virtual currency as a harbinger of a future in which nation-states have less agency could be turned away by the government interest here. This perspective spans a number of political ideologies, and is certainly not a straightforward issue. For all of the different political opinions on this, however, there are also technical reasons that the presence of government mediation might give investors pause. A major benefit of the technology behind these coins is that it allows for peer-to-peer transfer, allowing for the disintermediation of flows of value and information that are typically dependent on third-party administration. There is real concern about the possibility that policymakers will disturb the decentralized, peer-to-peer capacity of blockchain finance. So when governments discuss oversight and regulation of Bitcoin, it does not always build user confidence. This corresponds with the issue of image and perception, but also bears on the technical specifics that make the concept of electronic money possible in the first place.
A number of high profile cases reflect how sensitive digital currencies are to current events and exaggerated press. The Mt. Gox scandal is one of them; so is the DAO hack and its aftermath. And right now there’s a great deal of speculation on how Bitcoin will be regulated by both governments and as a function of its own design — (see: the Bitcoin block size debate).
It’s unclear whether Bitcoin and Ether will become as stable as traditional currencies or assets like gold and silver, but an informed populus can certainly help.