In 2017, Bitcoin’s value soared from $1200 to around $25,000 before dropping down to around $16,000 at the end of the year. Since then, it’s value has risen and dropped sporadically from day to day, dragging smaller cryptocurrencies such as Ether and Ripple along with it.
If you’re new to cryptocurrencies, this kind of volatility can be dizzying (and painful if you invest at the wrong time), but if you take a closer look it starts to make sense. Here’s why Bitcoin’s price keeps changing so drastically, and why it may get more stable in the future.
Bitcoin Is Still Very New
Bitcoin was first released in 2009, but it only really gained mainstream popularity in 2017. The technology is still extremely new and misunderstood, and that’s a big part of why it’s value is so hard to pin down.
Add to that the fact that most of the Bitcoin in the world is owned by a tiny group of people. As of late 2017, about 95 per cent of the cryptocurrency was owned by just over four per cent of people with Bitcoin, according to one report. That means that a single person could decide to release huge amounts of Bitcoin into the market at any moment, completely upending it’s value.
The price of Bitcoin can also change drastically as countries and financial institutions adapt to the idea of cryptocurrency. For example, when one of South Korea’s biggest banks tested out the technology it caused a spike in value. On the other hand, when China announced plans to crack down on sketchy Initial Coin Offerings (ICOs) the value of Bitcoin dropped, and the same thing happened when a South Korean government official said the country might ban cryptocurrencies altogether.
Bitcoin is Different From Everything That Came Before it
Bitcoin isn’t really like anything else thanks to the blockchain technology that powers it. It’s also treated differently than other types of currencies and commodities because we’re still not sure what it’s actually for. That leads to a lot of instability.
The original pitch for Bitcoin was a frictionless version of money that you could send to anyone all over the world: Cash for the internet. However, because Bitcoin’s value rose so dramatically, and because each transaction takes a ton of computing power (and electricity) to process, it doesn’t actually work very well as a form of spendable money. That’s created uncertainty, which leads to rapid changes in its value.
Unlike other types of investments, such as stocks or gold, Bitcoin trading never stops, either. There are no market hours. Instead, you get non-stop 24/7 trading, which means even more fluctuations in Bitcoin’s value and less stability day-to-day.
It seems like every few months we hear what's basically the same story about someone who bought a bunch of bitcoin but lost access to it once the cryptocurrency became really valuable. The latest, from Engadget, tells the tale of a reporter who managed to salvage $US200,000 ($263,713) in bitcoin after travelling to Hong Kong and getting extremely lucky.Read more
How Bitcoin Could Become More Stable
The best bet for Bitcoin is that as it becomes more popular and more people buy it, these types of changes in value will go down for two main reasons. First, individual owners have less power over the price of Bitcoin, and, second, it creates stability since more people have a stake in the cryptocurrency.
The other possibility is that government regulation could help stabilise Bitcoin. In the short term, that could cause its value to drop drastically (like what happened in China and South Korea), but in the future it could help calm down speculation and drive out the types of sketchy Bitcoin-related business that threaten to drag down the entire concept of cryptocurrencies.
This story has been updated since its original publication.