As per the Bitcoin Volatility Index, (in March-April 2021), the latest 30-days volatility of Bitcoin is 2.88%, which is lower than the latest 60-days volatility of Bitcoin (which is 3.64%). If we check the volatility index in the last 10-years, we will find that it has come down significantly over the years.
In June 2011, it was hovering around 16%. In August 2013, the volatility level decreased to 14.41% and further to 7.81% in January 2015. In January 2018, it has further come down to 6.88%. On March 30, 2020, the volatility level shot up significantly to 10.88%. Since then, it started falling and bottomed at 1.11% on July 20, 2020. On April 12, 2021, the volatility level is hovering around 2.92%.
These data show that the volatility level in Bitcoin prices is falling sharply. Now, the question is what are the reasons behind this volatility? Let me explain:
When BTC price is compared vis-a-vis any fiat currency (say, US Dollar), the high fluctuation is mainly due to Bitcoin’s perceived store of value against the fiat currency. This is mainly because Bitcoin has gold-like properties. The maximum quantity of Bitcoin availability is capped at 21-million BTCs. This limited supply generates the value of Bitcoin (BTC).
Bitcoin differs significantly from fiat currency. Fiats are issued and managed by the governments and central banks to maintain low inflation, high employment, and satisfactory growth through investment in capital resources. However, Bitcoins have a store value, similar to that of gold. As fiat currencies have their own weaknesses (including uncontrolled printing of fiats in times of economic downturns and uncertainties), it is always recommended to invest a part of the investment in Bitcoin.
The volatility of Bitcoin price is driven mainly by varying perceptions of BTC’s intrinsic value in terms of:
- Store of value
- Method of value transfer
Why does the perceived intrinsic value of different people about Bitcoin change? To understand this concept, it is important to know what store value is. A store of value is the function by which an asset can be useful in the future with some predictability. A store of value can be saved and exchanged for some good or service in the future. Currently, it is still not clear what the store of value of Bitcoin is.
However, when it comes to Bitcoin as a method of a value transfer (which involves any object or concept used to transmit property in the form of assets from one party to another), the value transfer is nearly frictionless. That’s the reason why Bitcoin’s value swings based on news events much as we observe with fiat currencies.
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