Bitcoin is a digital currency that is decentralized and not managed by any government. It’s been around since 2009 and has gone through wild fluctuations in price over the last few years. Some people are undecided whether to hold Bitcoin or sell it. In order to make an informed decision, it’s imperative to understand what drives the price of Bitcoin and what effects it has on other currencies. On the whole, Bitcoin is a highly volatile currency that has a lot of risks associated with it. However, there are many reasons why people still invest in this currency. And because of the significant changes in its value over the last few years, many people are undecided whether to hold or not hold Bitcoin now.
Understanding the Volatility of Bitcoin
Bitcoin is a very volatile currency. The price of Bitcoin has been known to fluctuate by as much as 30% in a day, which is huge compared to other currencies. This means that one cannot hold Bitcoin for any considerable length of time without taking significant risks, especially given that its value is quite high right now. However, it’s important to know that a lot of this volatility is due to external factors, such as the market situation or certain other emerging currencies. In the long run, the fluctuations of Bitcoin should be minimal.
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Risks Involved with Holding Bitcoin
The first risk involved with holding Bitcoin is that one may lose a lot of its value. The price of Bitcoin has been known to go down by as much as 50% in a day, which means one has to be very careful when buying and selling it. If one buys or sells Bitcoin just a day before its price shoots up or down, there is a very high chance that one will not be able to capitalize on it. The second big risk associated with Bitcoin is that the value can change rapidly. The value of Bitcoin has been known to fluctuate within minutes, and there have been occasions when it dropped by as much as 30% in a single hour. This means that any transaction at an exchange would be valued in its present form instead of taking the final amount into consideration. This can lead to one ending up comparing higher numbers through an exchange than actually buying and selling it.
Understanding the Price Fluctuations
It’s vital to understand the primary factors that affect the price of Bitcoin in order to make an informed decision on whether to hold or sell it. The primary factor is the demand and supply of Bitcoin. In any market, the demand for a particular commodity and the supply for it are two major factors that have a direct bearing on its price. It has been observed that in markets where the demand for a commodity is high, and the supply is low, its price shoots up. It’s also important to note that Bitcoin has a finite supply of 21 million coins. As the number of available coins increases, the price will decrease in correlation with it (due to the law of supply and demand). When demand for Bitcoin is high, there are more transactions which leads to more price fluctuations. When demand for Bitcoin decreases, there are fewer transactions which has an adverse effect on its value.
The bull case of bitcoin:
Aside from the general factors that affect the price of any commodity, there are certainly other elements that contribute to its volatility. Bitcoin has been known to be affected by certain specific events, such as exchange rate fluctuations in countries like China and India. There have also been instances when government agencies release news about Bitcoin, which leads to a sudden surge or decline in its value. This can go on to directly influence the value of other currencies and even stocks. For example, if the price of Bitcoin rises significantly, there’s usually a huge upswing in the value of other commodities and stock markets as well.
However, that doesn’t mean that it isn’t valuable either. Experts suggest that it may very well replace other commodities in the future once the initial problems have been sorted out. There’s still a long way to go before Bitcoin is accepted as an official medium of exchange by governments and businesses alike.
It’s very important to understand the risks associated with Bitcoin before investing in it. However, that doesn’t mean that one should completely avoid Bitcoin, as there are lots of benefits associated with this currency in the future. It’s just that one should invest in Bitcoin only after understanding all the risks involved with it. Also, for novice investors who want to make a quick buck by investing in Bitcoin, there are many dangers involved with this currency, and one can lose a lot of money if they’re not careful when trading it.