11 Factors that Can Determine Bitcoin Price Volatility

Since Bitcoin was introduced more than a decade ago, its price has been rapidly rising and frequently associated with high volatility. Historically speaking, the rapid changes in Bitcoin price and value have made it consistently volatile.

Like most existing digital currencies or cryptocurrencies, Bitcoin is a very volatile cryptocurrency. Many past instances have shown how volatile Bitcoin value and price have been and can be; one instance for example occurred when, between November 2017 and December 2017, its price had increased by at least 220 percent.

But why has bitcoin price and value been so volatile? Well, the upward and downward price fluctuations and volatility of Bitcoin price on cryptocurrency exchanges are determined by many factors. This article discusses 11 factors that have determined and can still determine Bitcoin price volatility, and Bitcoin price and value around a particular time period. Now let’s get right into it: the 11 factors are as follows:

1. Search Pressures on Keywords Associated with Bitcoin, Particularly on Google Searches Made for the Word “bitcoin” (Hans Bystrom & Dominika Krygier, 2018); this conclusion was arrived at after correlations, OLS-regressions and VAR-analysis were used to analyze daily, weekly, and monthly data between 2011 and 2017 and examine the link between the volatility in Bitcoin market and the volatility in other related traditional markets (gold, currency, and stock market); by using different loss functions, the research also showed that by studying Google search activity, predictions on Bitcoin price volatility can improve.

Other research works on “Google search trends and Wikipedia articles views” (Kristoufek, 2015 and Glaser et al., 2014), “Twitter sentiment analysis” (Kaminski, 2014, and Georgoula et al., 2015), and “Online communities reactions” (Dwyer, 2015, and Kim et al., 2016) support Hans Bystrom and Dominika Krygier (2018) conclusion that search pressures (Bitcoin’s attractiveness to people) on keywords associated with Bitcoin can determine Bitcoin price volatility.

2. Volatility in the Dollar (USD) Currency Market (Hans Bystrom & Dominika Krygier, 2018). The fluctuation in the prices of goods and services (the Euro/USD exchange rate) can create volatility in the USD currency market which can also determine Bitcoin price volatility: generally, volatility in the USD market can determine the number of dollars that would be paid to buy a Bitcoin, and this would subsequently determine Bitcoin price volatility.

3. Bitcoin Demand (Ciaian, Rajcaniova & D. Kancs, 2016): Bitcoin demand affects Bitcoin price which, subsequently, can determine its volatility depending on how high or low the price range is on a daily, weekly, monthly, yearly, or longer-term basis. Contrary to the notion that both supply and demand affect Bitcoin volatility, Ciaian, Rajcaniova & D. Kancs (2016) and Kristoufek (2015) noted that, because Bitcoin has a deterministic supply (21 million Bitcoins), only its demand can determine its price.

Georgoula et al., (2015) employed a VEC model and found out that in the long run, Bitcoin price—and subsequent volatility—is positively related to the number of Bitcoins in circulation. The more that BTC is recognized, the more that people would want to accept it, buy it, and use it as a means of payment.

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4. Bitcoin Supply and Demand (Sana Guizani and Ines Kahloul Nafti, 2019); but demand has a more significant impact on Bitcoin price volatility and value than supply does because Bitcoin supply is limited (Ciaian et al., 2016). According to Sana Guizani and Ines Kahloul Nafti (2019), supply and demand are the major forces of the market and are also traditional determinants of the price formation of any financial asset. This notion contrasts the notion that only Bitcoin demand—as noted by Ciaian, Rajcaniova & D. Kancs (2016)—can determine Bitcoin price and subsequent volatility.

5. Changes in Prices of Oil and Gold (Wijk, 2013). Wijk proved that oil price and Nikkei index had a negative effect on Bitcoin price; subsequently, this could negatively impact Bitcoin price volatility and Bitcoin price and value around a certain time period. On the other hand, Wijk proved that Dow Jones index had a positive effect on Bitcoin price in both the short and long terms.

According to Palombizio & Morris (2012), oil price is one of the major sources of pressure on costs and demand and may result in a decrease or an increase in Bitcoin price and Bitcoin price volatility. Empirical findings in other research works have shown that there are relationships between changes in prices of gold and oil, and volatility in prices of cryptocurrencies (Teker D., Teker S, & Ozyesil M., 2020).

6. Difficulty of Mining Bitcoin (Li and Wang, 2017). Li and Wang suggested that the process of extraction, which depends on the operation and maintenance of computers, softwares, electricity, and human resources, incurs costs that influence Bitcoin price and volatility.

7. Influence of Mass Media. Mass media consists of any medium or technology used to pass information to mass audiences; it is a much wider platform than the internet which is only a part of it. Mass media includes radio, television, newspapers, magazines, and the internet. From the conclusion arrived at by Hans Bystrom and Dominika Krygier (2018), it would be easy to agree that the influence of mass media can determine Bitcoin Price volatility. Greater media coverage and acceptance of Bitcoin—which has been the case around the world—would lead to higher Bitcoin demand, and affect Bitcoin price volatility.

8. Bitcoin Arbitrage Trading and the activities of Bitcoin Traders. Bitcoin is traded across many different exchanges, and traders have different trading skills on Bitcoin arbitrage which captures slight differences in Bitcoin price across various Bitcoin exchanges and provides opportunities for a trader to buy Bitcoin at the lower price on one exchange and sell it at a higher price on another exchange.

The trading strategies employed by traders (who intend to take advantage of the price differences between exchanges) can cause changes in Bitcoin prices and determine Bitcoin price volatility. If Bitcoin is cheaper on Luno but more expensive Coinbase, then it’s likely that traders would like to buy Bitcoin on Luno and sell it on Coinbase; most times, the leverages and thin volumes on Bitcoin trading exchanges that involve such activities create sloppy fill prices that result in more losses than drive Bitcoin price downwards, and make it volatile.

9. Political Decisions taken by Governments. It is well known that political events and decisions have changed the value and price of Bitcoin, and determined Bitcoin price volatility. For example, in the not-too-distant past, the trade war between China and the USA, and the unstable relationship between Iran and the USA, has had an impact on the price of Bitcoin and determined Bitcoin price volatility.

Also, governments have been constantly changing regulations regarding Bitcoins; these circumstances have caused Bitcoin price fluctuations and made Bitcoin volatile at certain points in time; for example, in 2017 when China decided to halt the activities on several trading platforms, the price of Bitcoin plummeted. In 2018, within 24 hours after various governments in Asia made announcements concerning expected regulatory changes, there was around a hundred billion dollar drop in the cryptocurrency market.

10. Increasing Distrust in Fiat or Traditional Currency. Bitcoin price volatility, especially its rise in the long run, has been driven to a great extent by an increasing loss in confidence that people have had in conventional fiat currencies like the dollar, euro, and pound. The increasing level of distrust and loss of confidence in many economies have made people put more trust in Bitcoin and other cryptocurrencies, instead of in fiat/traditional currencies; this has affected Bitcoin price and impacted its consistent volatility. Many people have lost complete trust in their country’s currency and banking system and looked to Bitcoin as an alternative in which the value of their money can be stored, maintained, and increased.

11. Bitcoin Security Breaches and Theft. Bitcoin and many cryptocurrencies have made headlines because the platforms that stored them were vulnerable to attacks from cybercriminals who hacked the platforms’ systems, and in certain instances made them bankrupt: grand thefts occurred and lots of cryptocurrencies were stolen; these incidences fluctuated Bitcoin price and value, and affected Bitcoin price volatility. In addition, reports about thefts and losses had a greater impact on Bitcoin price volatility: usually, they raised the value of the remaining Bitcoin because of the resulting scarcity.


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