Everything You Need to Know About Bitcoin's Price Volatility
Bitcoin's price is highly volatile. That's one of the first things you'll learn as a bitcoin investor.
But why does the price of bitcoin change so rapidly, and what can you do about it? Keep reading for a guide to bitcoin price volatility.
What Is Bitcoin Price Volatility?
Price volatility refers to rapid changes in the exchange rate between bitcoin and fiat currencies, like U.S. dollars. High volatility means that price changes quickly and constantly.
How Volatile Is Bitcoin?
Compared to traditional assets, like stocks and bonds, bitcoin's price is remarkably volatile in both the short-term and the long-term. Changes in bitcoin price of 10 to 20 percent between one day and the next are routine.
During periods of sustained decline, bitcoin can lose two-thirds of its value, as happened when bitcoin's price shrank from around $20,000 in late 2017 to a low of about $6,000 a month later. (The price of bitcoin has since risen back to around $10,000.)
Other types of assets can experience price volatility as well, of course. But for comparison, consider that the largest single-day stock market decline in history, which occurred on October 19, 1987, involved a loss of around 22 percent.
For bitcoin, a day like that would not be especially unusual.
Why Does Bitcoin Price Change So Much?
What drives rapid changes in bitcoin's price?
The root of the volatility is the fact that bitcoin remains a new type of asset that possibly faces what you might describe as existential threats.
By existential threats, we mean that some investors worry something will happen that will totally destroy the value of bitcoin because people will no longer be able to use it to buy and sell things—which is the activity that gives bitcoin its value.
Existential threats could come in the form of efforts by governments to ban bitcoin. A handful of small countries already ban bitcoin, but when reports surface of larger countries planning to do so, the price of bitcoin tends to take sudden dives. Speculation that the Indian government was going to outlaw bitcoin (which has not happened) contributed to bitcoin's most recent decline, for example.
Similarly, efforts by some banks to prevent the purchase of bitcoin using credit cards also raised fears of existential threats to bitcoin's value.
These sorts of threats to bitcoin's price make bitcoin different from other types of assets. Take a house, for example. If the housing market tanks, the house that you bought for $500,000 might suddenly be worth only half of that. But it would be virtually impossible for your house to lose all of its value. As long as it's still standing, and the land it sits on doesn't wash away, the house is always going to be worth something. And if you can wait out the market crunch, you have a very good chance of recovering the lost equity in your house.
The same is true of assets like stocks. The value of your stock portfolio is based on the value of the companies in which you own stock. Stocks may decline in value if a company loses value. Except in extreme cases, however, companies tend never to lose all of their value. Even if they go bankrupt, asset liquidation or acquisitions can help investors to recover some of their investment.
With bitcoin, things are different. Because the asset is so new and has yet to be fully accepted by traditional financial and political institutions, investors worry that something could happen that would make bitcoin totally worthless, wipe out all of their bitcoin investment and leave no possibility of recovery.
How Can You Manage Bitcoin Price Volatility?
Investors seeking to mitigate the potential damages from rapid bitcoin price changes can adopt several strategies:
- Use dollar cost averaging. By buying bitcoin in small amounts on a recurring basis—a process known as dollar cost averaging—investors help to protect themselves against sudden changes in price.
- Diversify your cryptocurrency portfolio. Investing in several cryptocurrencies, rather than just bitcoin, can insulate investors from changes to bitcoin's price. The price of bitcoin might fall more rapidly than that of other cryptocurrencies. For example, in recent weeks the price of Ether has been more stable than that of bitcoin, so investors who hold both currencies have not suffered from price fluctuation as much as those who own only bitcoin.
- Don't time the market. "You can't time the market" is age-old investing advice. It applies to bitcoin investing, too. No one can predict when bitcoin's price might start rising or falling. Plus, the fact that exchanges like Coinbase have a history of becoming overwhelmed during times of peak bitcoin price fluctuation, which prevents investors from cashing out quickly, means that you might not be able to save your investment if you time the market incorrectly.
- Invest for the long term. Even though bitcoin's price is much more volatile than that of other types of assets, it has still risen consistently over the long term. If you can afford to keep your capital invested in bitcoin for an extended period, you are likely to come out in the black.
The bottom line: Bitcoin price changes rapidly, and that is likely to remain the case for a while to come. However, by investing wisely, investors can take advantage of bitcoin appreciation opportunities while controlling for the price volatility.
Interested in getting a better sense of your financial standing? Get your credit report from banks.com today.