Why does bitcoin rise and fall?

Crypto’s volatile market makes it feel very boom or bust. Here’s all you need to know about those wild swings.

Up and down, up and down. All markets have their highs and lows, of course, but crypto’s numbers make for a far more dramatic investing ride than traditional stocks. Whether it’s bitcoin, ethereum or any other altcoin, if you have money in there, you’ll know that your value can be wildly different from one day to the next. Sometimes it can even change significantly from hour-to-hour.

It can be a thrill, but it carries a lot of risk.

How much does crypto fluctuate compared with more traditional stocks?

Well, they’re all constantly fluctuating in some sense, but crypto certainly tends to have much higher rises and lower falls. In the last year, Apple has had a 31.78 per cent return, where Tesla (a pretty volatile stock) has a 87.30 per cent return. Bitcoin has a 298.02 per cent return and Ethereum has a ridiculous 709.49 per cent return. At time of writing gold is at ‑9.78 per cent for returns across the last year. Again, the rises aren’t always guaranteed (losses can be just as drastic). But while percentages in the hundreds are rare across the traditional stock market, in crypto-land they’re pretty common.

No wonder people end up getting really into it. Why does it vary so much?

Right? It can be pretty addictive knowing that every time you load up the wallet something will have likely, significantly, changed. The price varies so much for a few reasons.

Let’s start with the rises. Rises are mainly down to positive perception in the media. Some news makes a lot of people think bitcoin really is the future! I’m gonna get some and/​or buy more!” This news can range from a country or international business deciding to use or accept crypto such as PayPal, to Elon Musk sending a tweet. The importance of the news doesn’t equate to how much it rises, either. It can also rise when a company (or people) decide to buy up a lot of coins, as there’s only a certain number of bitcoin in circulation. This usually happens as a reaction to an event or the news.

It’s that old-as-time supply and demand concept. You can also see a relative gain in crypto when the fiat (government approved currencies such as dollars and pounds) currency inflates. Just like currencies do with their exchange rates.

Does it always go up and then down?

No. It can go up and up and up, or the opposite. It can stay more-or-less stagnant, and it can chop and change. There’s never really a pattern – though, of course, any hint of a pattern is what brokers look for.

Over the last few months, there has been what is known as a bear market, which occurred when Musk (and others) wiped a few hundred billion dollars off Bitcoin’s value after highlighting the concerns that bitcoin is harming the environment. A bear market occurs when there’s prolonged price decline and the company – or coin in our case – is getting a lot of heat from the media and other organisations. This is why buying the dip isn’t as foolproof as it sounds.

What goes up doesn’t necessarily come back down, nor do downward spirals always recover. Over the last couple of weeks, bitcoin has been steadily rising in value again, which can signal a bull market (the opposite of a bear market). So when you start to look at the patterns, the only thing it resembles is a GTA cheat code.

Right, that’s more clear. Anything else?

While you’re here, it’s worth knowing that even if you just have altcoins and/​or ethereum, any news affecting bitcoin will end up affecting your coins, for better or worse. This is because bitcoin is a relative giant compared with every other cryptocoin. So when bitcoin is doing well, people ask: What’s the point in the others?” And when bitcoin is doing badly people ask: Which of these other coins can be the future?” Plus, for much of the mainstream media, bitcoin is basically synonymous with cryptocurrency.

That’s all… for now. Keep your eyes peeled for next week’s crypto class.

Speak to a Financial Conduct Authority registered financial adviser before taking financial advice, and think carefully before making any decision.

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