The cryptocurrency market is volatile. There have been many instances when bitcoin’s price has risen or fallen by thousands of dollars in a single day. Why does this happen? Is it irrational exuberance? Or do other factors influence the frequency and amplitude of bitcoin price fluctuations? In this article, We will take a look at these things. The latest trend in the crypto world is Ethereum, and you can purchase them using the ethereum trader.
Price Bubbles and Irrational Exuberance
Regarding the history of bitcoin, price bubbles have been a common occurrence. The cryptocurrency market is volatile and can undergo extreme swings in value. For example, the price of bitcoin fluctuated between $1,100 and $3,200 between January 2017 and December 2017. During this period, there were three distinct spikes in value, with each spike being followed by a crash back down to pre-peak levels.
This is known as irrational exuberance, which occurs when investors are overly optimistic about an asset’s future potential while ignoring its current level of value. In this case, investors became too optimistic about bitcoin based on its current levels without considering what might happen. When those levels fell again due to increased supply or decreased demand for BTCs across exchanges.
What is Compounding?
The first thing to understand is what compounding is. Compounding is the process of earning interest on the interest you earn, which can be a great way to grow your money over time. For example:
- If you start with $100 and compound at a 5% annual rate for one year, your investment will be worth $105.00 (100 x 1.05).
The Kelly Criterion
The Kelly Criterion is a formula for calculating the optimal size of a bet in a game of chance. It’s used for maximising your expected growth rate over time, and it’s named after Edward O. Thorp, who wrote the book on it in 1962.
Bitcoin (BTC) Volatility Measures
The standard deviation of daily returns measures Bitcoin’s volatility. The daily standard deviation for Bitcoin is high relative to other currencies and assets but low compared to other cryptocurrencies:
- The standard deviation for Bitcoin is about 9% over the past year (compared to an average of 4% for currencies) and about 16% over the past four months (compared to an average of 10% for fiat currency pairs).
- The average daily price change was -3%, with 68% of days seeing positive returns.
Bitcoin’s (BTC) Volatility as a Rational Instrument of Market Sentiment
One of the most important characteristics of bitcoin is its volatility. Bitcoin is constantly changing in value, and its price fluctuations can be dramatic. While this may seem like a weakness, it’s one of bitcoin’s strengths as an investment. It provides investors with strong signals about market sentiment.
Bitcoin has been called “digital gold,” a comparison to precious metals that have historically been considered stores of value, think gold or silver coins. Like gold and other precious metals, bitcoin also has high barriers to entry for new users. It requires specialised knowledge and equipment to buy, sell or store safely. This makes bitcoin even more sought after than standard investments like stocks or bonds because it has a low correlation with other assets. If prices fall in traditional markets due to economic uncertainty, owning bitcoins will still be worthwhile and might even become more valuable.
Bitcoin has experienced many price bubbles, but they’re not like other bubbles you’ve seen in history because of its unique characteristics as a new currency that can be traded internationally without restrictions or fees (except for mining fees). This makes it challenging to compare bitcoin with any other commodity or the stock market, influenced by national economies, supply-and-demand trends, and seasonal factors.
We hope this article has helped clarify the complicated relationship between bitcoin’s price, volatility, and sentiment. Bitcoin is a new and exciting technology with lots of potential for future growth. But it’s also volatile in its current state. And that makes sense because it still has a long way to go before becoming the “digital gold” we all want it to be.