Why does the price of bitcoin increase so fast?

Andrew Munro 11 December 2017 NEWS

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The ups and downs.

Since its creation, bitcoin prices have been volatile compared to most other assets and currencies. But the last quarter of 2017 has seen it go truly wild, jumping thousands of dollars a day.

There are a lot of factors pushing the prices, but some anomalies in supply and demand might be the main ones.

The upwards-moving prices come from an influx of buyers, but the most outrageous price movements occur when this accompanied by a drop-off in the number of sellers at the same time.

More buyers, fewer sellers

By some measures over a million people a day are buying bitcoin for the first time. Some of the key factors are probably:

  • FOMO: Fear of Missing Out (FOMO) has always been an effective sales tactic, and no one wants to miss out on the bitcoin goldrush.
  • Market infrastructure: A couple of years ago you needed some technical expertise to get involved, but these days anyone can easily buy bitcoin.
  • Hype: For years now there's been a bitcoin price spike almost every time it's mentioned in the news. Now it's all over the news every day.

More people are buying bitcoin than ever before, which pushes up prices. But the reason it's so such a sharp rise might be the simultaneous drop-off in sellers.

The vast majority of bitcoin buyers are doing it as an investment. They're buying with the intention of just holding onto their coins and watching the price go up. This skews the supply and demand disproportionately, driving prices up even faster.

All of the above factors are causing price to skyrocket. And with prices changing minute-to-minute, more casual sellers start hanging out waiting for the prices to peak before they sell.

You can clearly see this in the latest price spike. After the price peaks, sellers return the market and consolidate their profits.

Historical Rate chart of BTC and AUD

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Updated: 16 Aug 2018 23:38:20 UTC

A cause for concern?

That cycle can drive an extraordinarily fast price rise, regardless of the actual quality or viability of bitcoin (or anything else that falls into the same cycle). It's also self-driving and the faster prices rise, the faster they'll often keep rising.

Of course, a bitcoin is only worth anything if you eventually sell or spend it. Simply holding onto bitcoin forever is pointless.

But the rising popularity of bitcoin hasn't seen it become more widely accepted as a payment method. It's actually had the opposite effect. Fewer merchants accept bitcoin now than they did a few years ago.

This is largely because hyper-volatility doesn't make for a good payment method, and because bitcoin's scaling problems mean it actually gets less useful as it gets more popular and widely used.

If bitcoin doesn't become widely accepted as an actual payment method, the only way to get a return on investment from bitcoin is to sell it.

More sellers naturally pushes the prices downwards, and once you get prices on a downswing any bitcoin buyers are more likely to wait until it bottoms out.

The exact same process that's been pushing bitcoin prices upwards so sharply can just as easily push them downwards if the bubble bursts.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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