Thursday, September 11, 2014

Why Does Bitcoin's Value Fluctuate So Much?

Introduced as open-source online payment software in 2009, Bitcoin in simple words refers to a purely digital currency which is used primarily for online payment purpose. Although, it was recognized by the US Treasury as a decentralized virtual currency, the popularity of cryptocurrency is still in developmental stages and is not as widely accepted. Despite of being a purely virtual currency, Bitcoin is one of the most volatile currencies and the prices can fluctuate even in a normal market situation. Despite of several shortcomings as a viable currency, the popularity of Bitcoin among online users has grown rapidly since its introduction. Given below are the various reasons why the value of Bitcoin fluctuates so much.

1. Buyer Protection
Several banking agencies like the European Banking Agencies have issued several warnings about Bitcoin lacking any sort of consumer protection. This means that if you use Bitcoin online to buy a product and the seller doesn’t deliver it or the product is faulty, then there is absolutely nothing that you can do to recover your lost Bitcoin cash. While this problem can be resolved through escrow services, but this definitely makes the investors apprehensive about investing in a poorly protected currency.

2. Bad Press Reviews And Use In Illegal Trade
Bitcoin’s popularity was severely hampered due to the news about Bitcoin being regulated by the government. There were several instances of it being used in illegal drug trade via the Silk Road which also resulted in the marketplace being shut down by the FBI in 2008. Trade has picked up since then but these incidents have also created an unrest and disbelief in the value of Bitcoin among the people.

3. Digital Wallets Are Prone To Technical Issues
The vulnerability of digital wallets to data corruption and virus make it a really dangerous currency to invest. Bitcoin currency is usually stored on a computer hard drive which is susceptible to data loss and can very well bankrupt a wealthy investor. The coins collected on the hard drive are also lost permanently with no chance of recovery and will be permanently orphaned by the system.

4. Deflation
Unlike regular currencies which are valued against a solid standard such as gold or silver or another valuable currency, Bitcoin’s price is regulated due to its limited production. The current mining technology limits its production to 21 million and is thus prone to deflation. Since the value of each Bitcoin will increase each day, the question of when to spend the currency will be a serious problem for the investors and result in spending sprees. A sudden surge in spending can not only cause deflation but also unexpected volatility.

5. Security Breaches Due To Poor Software Design
Due to being operated through an open-source database, the source-code can easily be modified and hacked by anyone. This makes it an extremely unsecure form of currency to invest in. Recent news about the OpenSSL attacks by the Heartbleed bug in April, 2014 has led to even further repercussions in the value of Bitcoin in the market. The value of Bitcoin is highly based on the people’s confidence in the software design and security breaches as such can act like a bane to its popularity and use.

6. Tax Treatment
Despite of its small value, the volatility of Bitcoin was highly affected by the recent announcements by the IRS. In March 2014, the IRS announced and recognized Bitcoin as an asset that is taxable under the US law and made it mandatory for the users to record its value at the time of each transaction. This has led to a sudden decline of Bitcoin users and investors as book keeping is essentially troublesome for what the currency is worth.

Despite of its several advantages as an unofficial cryptocurrency, Bitcoin is met with several challenges and obstacles to its growth in use. The above reasons for its volatile and constantly fluctuation prices have led to a bad perception of its value in the investors.  Nevertheless, Bitcoin is also viewed as a sign of a maturing market and changing trends in global economics by several investors and there might be a bright future after all for the digital currency.

Author: Luke Peters is an active trader on several forex related platforms like and has written several articles related to law, trading, finance, and financial management. He likes to spend most of his time reading various books and literature related to the respective niches

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