Cryptocurrency Check: Why are Bitcoin prices so volatile? MintGenie explains

Around six year ago, the price of one bitcoin hovered around $580 (equivalent to nearly ₹40,000) in August 2016. Not only this, it was selling for around $11,200 (nearly ₹8,17,000) in Aug 2020 before it spiked to over $37,600 (nearly ₹28 lakh) in August 2021, registering a whopping growth of around 236 percent in just 12 months.

Now, in September 2022, it has now declined to $20,210, reporting a considerable fall of 46 percent in a little over one year.

Investors often wonder why the price of bitcoin fluctuates so sharply. The unpredictability in price makes it seem “unreliable” as an investment among a section of investors. But to understand why its price changes so fast, we must know the reasons that drive this cryptocurrency and importantly — its demand.

Reasons for the spike

One key reason for a massive jump in its price is that the established institutions such as pension funds, investment trusts have now started to invest in it. Until 2017, bitcoins were invested into by individual investors. But with greater acceptability, many billionaire investors and financial institutions have now come out in open in favour of bitcoin and its future. For instance, JP Morgan started offering bitcoin funds to its wealthy clients, and also created a digital coin JPM Coin to make payments using blockchain technology.

Musk effect

When electric car maker Tesla headed by Elon Musk bought bitcoins worth $1.5 billion in February 2021, the price of a bitcoin hit an all-time high to $44,000 (around ₹33 lakh). Later, Musk dragged his feet on allowing Tesla to accept payments in bitcoins by expressing environmental concerns that bitcoin mining uses large amounts of electricity. However, he again announced in July 2021 that Tesla will likely accept payments for Tesla in bitcoins, pushing the bitcoin prices again.

Greater acceptability

Vendors and merchants have also started accepting bitcoins. Paypal, Starbucks, BMW, Expedia and Zinga, among several others, now facilitate transactions in bitcoins. Any positive statement from central banks in favour of blockchain technology is likely to tip the scale in favour of bitcoins.

El Salvador became the first country in June to accept bitcoin as a legal tender starting September 2021. As a matter of fact, barely any institution or country is averse to the blockchain — the technology behind the creation of bitcoin.

So, bitcoin prices have jumped lately to new historic highs. Some have invested into it for the fear of missing out, while a few others are still unsure about its future. Whichever side one is on, it is advisable to exercise due caution before committing large sums to it.

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