One of the main hurdles bitcoin and cryptocurrencies, in general, will have to get over is the issue of volatility. The high fluctuations in price can be mouth-watering for the aggressive trader. However, for the merchant that accepts bitcoin as payment, it can be a gamble because the price of the bitcoin they received for payment may lose some of its value.
There are many factors that go into measuring the volatility of bitcoin. In most cases the smaller the market cap an asset has, the more volatile it can be. Since bitcoin has a limited supply of only 21 million, it has a much higher volatility than gold which has a $3 trillion market cap.
Experienced traders tend to like high volatility in an asset. This can make for some nice profits for the investor simply buying low and selling high – rinse and repeat. This is an effective method of both taking profit or acquiring more bitcoin. Bitcoin volatility should decrease as it matures and becomes more mainstream but the volatility risk will always be there.
Is bitcoin volatile enough for the price to go to zero? Theoretically, yes, because bitcoin has no fundamental price to fall back upon. Fundamental price is the value of the security despite the price of the stock – which is the price agreed upon by a buyer and seller.
Now that bitcoin futures and options can be bought, it is not likely that the volatility will doom bitcoin. People may find that bitcoin is usable as a transaction medium even though there is volatility. Soon to come regulations will probably help tame the extreme price swings as it brings in new traders with new money.
Until the market grows and stability builds, the volatility will remain a feature. Until the BTC market cap starts to grow into the trillions, it is highly unlikely that it will be stable enough to function as a currency. The volatility merely occurs because there is not enough liquidity. It is believed that when people are able to easily spend their bitcoin to buy a new car or fund a trip abroad, then the price will start to stabilize. This will require wider adoption by merchants of goods and services. Meanwhile, bitcoin holds the best performance track record of all cryptocurrencies and several other assets, while representing the most important financial innovation in history.