The bitcoin price is known for its sudden, massive moves and sometimes unpredictable behavior. Many people don’t understand how bitcoin can be so volatile, and are scared about its price. What’s the matter? What factors lie behind it? Let’s shed some light on why this happens
The bitcoin world has a notion of so called “whales”, very big holders. These are people (or entities) who possess absolutely massive numbers of bitcoin and are adept at manipulating the price. Whales can potentially orchestrate a sell-out, triggering other market participants. This, of course, causes bitcoin stock prices to go down substantially. However, the effect is usually not permanent: the price tends to recover after a certain time has elapsed. Whales can also cause a massive, rapid upswing, or an upward move. It’s not uncommon for bitcoin to reverse its direction out of a sudden. What do whales really pursue? Often, they simply hunt so called margin traders. Bitcoin margin trading, a highly risky activity, became increasingly popular. Margin traders usually have a certain price trigger after which they buy or sell at a loss. This is precisely what many whales are after.
Greed and fear
Bitcoin stock prices are largely driven by retail interest, meaning regular people with regular jobs and interests. Of course, such people are affected by mass psychology. When the price is on the rise, they become greedy and desperate not to miss out. When whales cause it to drop, they’re overwhelmed with fear. Another important factor is news: new announcements by the SEC can cause mass panic, while more positive news bring the opposite.
The China factor
China and bitcoin are traditionally intertwined. Bitcoin is produced by so called miners, server farms with specialized equipment (mining rigs). China is home to the biggest mining companies because of its cheap electricity prices. Chinese miners produce most of new bitcoins, which means they can manipulate the price as well. They’re very big holders and are able to influence the charts. On top of that, Chinese cryptocurrency regulations also come into play. When the Chinese government announced restrictions on bitcoin trading, it affected bitcoin stock prices severely. Nonetheless, Chinese users still remain very active users of bitcoin, and China-based exchanges make up a substantial share of all exchanges, including such prominent ones as Huobi.
Because of the so called “stock-to-flow” factor, the bitcoin price is expected to go up in the long term (even though it still can be subject to rapid downfalls). Stock-to-flow means how much of a certain asset we need to produce to reach its current supply, based on its current production quota. In case of bitcoin, this number is surprisingly high. Meaning, only a very small number of new bitcoins is produced every year, while the total supply remains very huge. Indeed, the basic rule of economics tells us about supply and demand. Fewer of new bitcoins means that the supply becomes narrower, while the demand coming from users remains the same. In the end, this is great for the price.