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Is Bitcoin becoming too unpredictable?

Guest Post

As many of us are now used to Bitcoin, we tend to forget a very simple fact about it. It’s still a relatively new currency, and it operates on relatively new technology. It’s still a long way from mainstream acceptance and familiarity [even though it’s getting there], and the majority of the public have never used it, and wouldn’t know how. Compared to a currency like the British Pound or the American Dollar, it’s been around for less than the blink of an eye.

New currencies are hard to predict when it comes to value and trading behavior. We don’t know what the long-term prospects of Bitcoin truly are, because we have no long term form guide to compare it with. There’s never been a major cryptocurrency before. We don’t know how well they fare over two or three decades. We don’t know well they’ll stand up to changes in legislation or attempts to introduce governance to them. We might, however, be moving a little closer to finding out.

It won’t have escaped anyone’s attention that Bitcoin has been more than a little volatile recently, even by its own high standards in that regard. That’s not necessarily a cause for alarm. There’s no such thing as a guaranteed buck when you’re trading in currency. At heart, currency trading is just a well-dressed version of an online slots game on websites like Rose Slots. Nobody knows what the outcome of the next spin will be in an online slots game, and nobody knows what the value of currency the day after you’ve invested in it will be either. Traders and online slots players are largely betting blind and hoping for the best. With a well-known and widely-traded currency, it’s possible to make an informed guess about which direction it’s heading in, but that’s not necessarily the case with Bitcoin. It is, by its very nature, unpredictable – but is it becoming too unpredictable to invest in?

Those of you, who follow headlines about Bitcoin in the mainstream media could be forgiven for reaching the conclusion that it has indeed become too volatile to make money with reliably. Barely a week ago, more than $20 billion was wiped from the value of the currency in the space of three days, taking the value of each coin below $7000. At the time of the crash, it was worth half of what it had been in June. That represents a massive loss for anybody who got on board with Bitcoin at the wrong time. The sharp drop – or ‘flash crash’ as some news outlets called it – was attributed to regulatory activity in China, where Bitcoin [along with all other cryptocurrencies] is being subjected to intense scrutiny from authorities.

The doom and gloom didn’t last for long, though. It barely even lasted two days. Showing remarkable powers of recovery, the value of Bitcoin had jumped back up above $7000 again by November 27th, climbing more than $600 dollars in value in the space of a few short hours. No immediate reason could be determined for the sudden upswing in value, but it would have come as a great comfort to nervous investors who must for a short while have questioned whether Bitcoin was on the brink of a disaster.

By the time of the recovery, the currency had experienced a ‘Death Cross’ – a notoriously dangerous pattern of behavior wherein the short-term average of the stock goes below the long-term average. Only three such events have happened in the history of trading Bitcoin, and the previous two have seen the coin’s value plunge to record lows. A ‘death cross’ occurring in the value of any stock is a red light to traders and serves a warning that a potentially terminal drop might be about to occur. On this occasion, it [so far] hasn’t happened, and nobody seems to know why.

Just because it hasn’t happened doesn’t mean that it won’t happen, though. Although the currency is back up above $7000 right now, there’s no way of knowing that it will stay there. As it’s changing dramatically by the hour, it may even have fallen back below $7000 again by the time you’re reading this article.

If it has, it will be yet another strange chapter in the recent history of Bitcoin, which has seen highs of $20,000 and lows of $3,000 within the past 24 months. While that makes it exciting to watch, it’s undeniably off-putting to big-money investors, who don’t enjoy the thought of their assets dropping 50% on a whim without any rhyme or reason, and on any day.

If the market continues to be so volatile and uncertain, it could result in long-term investors pulling out, and short-term investors being put off the idea of putting their money into a currency that could either double or quarter their cash within 24 hours. It’s true that there are many traders out there who believe in the ‘speculate to accumulate’ philosophy, but there are several attractive high-risk trading options that don’t come with the same level of risk or volatility that Bitcoin is currently displaying.

The currency will only be seen as an attractive proposition for so long as it consistently delivers a profit to those who trade in it. If people stop investing, the value of the coin will drop, and the whole concept of Bitcoin could fall into a death spiral.

Do we think that’s likely to happen? Hopefully not. There are enough major players involved in Bitcoin who understand that prices go down as well as up, and that if they stay with their investment for the long term, they’ll always make money in the end. Bitcoin will probably remain popular with the people who already trade in it for the foreseeable future – but it may struggle to attract fresh investment from elsewhere unless the level of volatility can be reduced or controlled.

All stock markets and stockbrokers expect a little volatility, but not at the level that Bitcoin has recently been displaying. Add that to the fact that the majority of investors still don’t truly understand the concept of cryptocurrency, and all signs point to the idea that trading in Bitcoin will likely remain a niche interest rather than a financial revolution.

Disclaimer - OBN is an informational website which aims to give the latest blockchain related news to the readers. Articles on OBN should not be considered as investment advice. Trading cryptocurrencies is a high-risk investment, every user is advised to consult an expert before making any decisions.