Bitcoin’s Volatility Is Declining – Here’s Why That’s Good News For Investors

Bitcoin (BTC -0.54%) has long been criticized for its high volatility, which is often cited as a major barrier to adopting the cryptocurrency as a legitimate investment. In recent years, however, volatility has been steadily decreasing, and this trend looks set to continue in the future.

Here’s why this shift could be the under-the-radar catalyst that leads to Bitcoin’s continued success in the coming years and decades.

Image source: Getty Images.

Why Bitcoin is Volatile

To start, let’s look at why Bitcoin experiences such dramatic price swings. Firstly, it is traded internationally 24 hours a day, seven days a week. It is not limited to fixed hours like the stock market. With people all over the world trading at all hours of the day, significant fluctuations can and do occur.

Second, Bitcoin is a relatively new resource. With limited historical data, the market struggles to assign an accurate price, which can also lead to sudden price swings. Unlike traditional assets, which have a history of finding real value in particular economic conditions, Bitcoin is constantly under pressure to find a more accurate valuation depending on market sentiment, recent news events and investor behavior.

Although Bitcoin remains more volatile than traditional assets such as stocks or bonds, there is a clear trend that volatility has moderated since the cryptocurrency was invented in 2009, with a significant decrease since 2022.

But why is this and how can it benefit investors?

A significant shift

There could be several reasons why Bitcoin is becoming less volatile.

One of the main draws of Bitcoin for investors is its use as a store of value. Many investors are now treating Bitcoin as a long-term investment option, rather than a short-term speculative asset. As more people start holding Bitcoin for longer periods of time, the demand for Bitcoin will become more stable, resulting in less price volatility.

In addition, the Bitcoin market is maturing. The world’s first cryptocurrency is no longer just a niche investment option for a few tech-savvy investors. It is now a common investment option for millions of people and even some institutions.

The combination of these factors helped Bitcoin’s total market capitalization recover and stabilize after a fall last year. Its market cap alone — now at nearly $600 billion, larger than all but a handful of companies — makes it harder for large traders or institutional investors to swing the price of Bitcoin, which in turn has reduced volatility. In other words, the larger the market cap of Bitcoin becomes, the more difficult it is for large buy or sell orders to have an effect on the price.

The opportunity at hand

So why is the decreasing volatility of Bitcoin a good thing for investors? Well, quite simply, it turns the narrative of high volatility on its head. Rapidly fluctuating prices have been one of the main reasons risk-averse investors have shied away, but as Bitcoin’s volatility subsides, its risk profile is becoming more akin to other traditional assets found in most portfolios. Over time, the cryptocurrency may become a more attractive option for portfolios at all risk levels.

Even better, as more investors begin to see Bitcoin as a legitimate asset class, demand for the cryptocurrency should continue to grow, which in turn will not only help stabilize the price, but cause it to rise as the pressure of increased demand meets Bitcoin’s. limited supply of 21 million coins.

This won’t happen overnight, but data shows that Bitcoin’s volatility has decreased over the years. Ahead of the day when Bitcoin becomes a legitimate asset for investors of all risk levels, that makes investing today a promising opportunity with the cryptocurrency still nearly 60% below its all-time high.