When the price of Bitcoin goes up, people go mining. But when the price of Bitcoin goes down, people go saving. As you can imagine, this creates a lot of volatile movements in the crypto market. Since it’s such an innovative and disruptive technology, adoption has been slow. Let’s take a look at what causes the volatile movements in the Bitcoin market.
What Causes Bitcoin Volatility?
There are a few main reasons why Bitcoin volatility exists. One of them is that Bitcoin is still being developed as a new technology, with limited regulatory oversight and no established business practices. As a result, there are going to be a lot of risks involved in investing in this volatile new asset class.
Another big factor is the state of the Bitcoin network. As more and more people become involved in the network, the more potential there is for hacks and DDoS attacks. While a lot of the risk comes from a lack of regulation, the Bitcoin network itself is also at risk of being hacked. That’s why something called code execution flaw (CXO) was found in the Bitcoin software, which could lead to a chain of catastrophic events.
Why Does Bitcoin Volatility Happen?
If the Bitcoin network were to be shut down tomorrow, the world crypto economy would collapse. It would take months, if not years, for business as usual to return to normal. In the meantime, volatility in the market would cause havoc for investors. With supply and demand constantly out of whack, the market would crash, sending investors to lose their money.
Volatile movements happen due to many reasons, the most important one being risk. The more risky a crypto investment is, the more you should look out for when buying and holding it. Risk-free investments like government bonds and money market funds are always safe. But if you’re investing in a company that might go bankrupt, you may want to consider a more volatile investment like Bitcoin or another cryptocurrency.
How To Minimize Your Risk If You Invest In Cryptocurrency
That said, there are ways to protect yourself if you decide to invest in cryptocurrency. First, understand your investment risk appetite. People who are willing to take significant risks with their crypto money usually do so to achieve something great. If you’re not willing to take too much risk with your money, then cryptocurrencies like Bitcoin aren’t for you.
But if you’re willing to take a small amount of investment risk to gain a lot of crypto reward, then there’s great potential for success with cryptocurrencies like Bitcoin. Understanding your investment risk appetite is the first step toward reducing your risk if you decide to invest in cryptocurrency.