Reasons For Bitcoin’s Volatile Year

July 16, 2021

To say that Bitcoin has had a somewhat volatile year is one of the biggest understatements a person could make. The figures speak for themselves. In 2021 alone, Bitcoin has seen the heady highs of $65,000 yet also fallen to lows of $30,000. Recently, it has been trading at around $40,000 in a rare period of relatively stable performance. However, why has it been so volatile this year, and will that continue? Here, we look to answer those questions by looking at the factors that have affected its performance journey so far this year. 

Reasons For Bitcoin’s Volatility In 2021 

The following news stories have heavily impacted Bitcoin’s price - sometimes for the better, sometimes for the worse. 

Elon Musk and Tesla

Being one of the richest men in the world (if not richest at times) comes with intense media scrutiny - particularly when you are an avid user of Twitter like Elon Musk. Any comments he makes therefore sparks mass interest within the investment world. In 2021, he has been both Bitcoin’s biggest supporter and detractor. At the beginning of 2021, he claimed that Tesla had bought over 1.5 billion US dollars worth of Bitcoin - which saw the cryptocurrency jump above $60,000. However, some more recent comments of his, caused a mass sell off when he alluded to the fact that Tesla was selling a lot of that holding, and that he did not believe that cryptocurrencies in general were run sustainably enough. 

Tightening of Tax Regulations in The US

Another reason that Bitcoin’s price swings so much is both its tax advantages and its potential tax disadvantages. Given how Bitcoin is a difficult asset for traditional tax organisations to trace, some holders of Bitcoin and other cryptos, use the asset class to shield their income from large tax payments. Ethical or not, not reporting Bitcoin income is somewhat of a grey area when it comes to tax evasion or downright tax fraud. 

However, many holders are starting to question whether they can protect their income through Bitcoin for much longer. The IRS, in the US, for example has started to request that people report their cryptocurrency holdings and there is also the fear that a US tax rise will double capital gains tax. The result? Much more tax even on Bitcoin assets, which is what many are seeking to avoid. 

Also Read: What The New Global Corporation Tax Means For Investors

China’s Ban on Cryptocurrencies

Additionally, China is also getting behind more regulation of the crypto market which immediately impacts Bitcoin as its biggest currency. China has banned financial institutions and payment companies from allowing cryptocurrency transitions. The government announced it was doing so to hamper speculative trading that could be dangerous to people’s wealth. The Government also asserts that the prices of Bitcoin and other virtual currencies are too easily manipulated. 

Asset Type

Because Cryptocurrencies, and therefore Bitcoin, are a relatively new asset class, it naturally brings with it a lot of volatility due to the unpredictability and uncertainties that surround it. Speculative trading is rife on crypto markets and huge volatility across all types of virtual currencies is all too common. The result is that until the asset class has a longer term set of performance figures, it will likely remain volatile. 

Plus, its everyday usage also makes it tough to put an exact value on it. With more and more online retailers accepting virtual currencies, its price will likely increase, but when it is not easily linked to value like money originally was to gold, it is hard to keep its price stable. Many investors hope that as the sector matures, its price will stabilise, but this year has shown that this is a way off yet. 

Finite Amount

Any investor will tell you that any asset that is finite has the potential to go up exponentially. The amount of Bitcoins in the world is just that - finite. There are only 21million bitcoins that can be mined in total. As a result, it means that value cannot be diluted in any way - as can occur with stocks. Additionally, as it is a global currency, it is not subject to different values in different countries like traditional currency markets are. With no exchange rates, investors benefit the world over from value fluctuations being limited to the asset itself - not other variables in different countries. These pros to holding Bitcoin act as a floor for the price and help support it - and allow it to rally well in the good times. Hence another reason for its volatility. 

Portfolio Diversification

Bitcoin remains an asset class that will add a great deal of diversification to your portfolio. Thanks to being such a new asset, how it swings in relation to the wider economics of the world is still not clear, but it means that it can add some protection to your portfolio if many other markets are down. Diversifying your portfolio to mitigate against the downside is a key way to preserve capital, which is something that many Bitcoin investors are concerned with - as well as asset growth. As a result, the demand for Bitcoin does remain - helping keep its price from plummeting to zero so far. 

Bitcoin’s Volatility

There is no arguing that Bitcoin’s volatility has been eye watering this year. In just a few days alone in May, it went up and down around 25% of its value. However, volatility is not always a bad thing. In fact, some investors relish it. It can allow for some fantastic opportunities to enter a market that in the long term will eventually rise, albeit with a great deal of short term price turbulence. 

Huge volatility is an added complexity though that does not make investing in this relatively new asset type easy - plus, the asset itself is less understood by many investors, who have traditionally invested in asset types like stocks or bonds. That in itself can put some people off, but it can also attract investors who are looking for new ways to grow their money.

Rachel Lee
Having worked at Morgan Stanley and BNYMellon for over 10 years in pensions and investments, Rachel now works as a full-time business and financial writer.

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