Bitcoin (BTC 3.26%) has long been criticized for its high volatility, which is often cited as a major barrier to adopting the cryptocurrency as a legitimate investment. However, in recent years, its volatility has been steadily decreasing, and this trend looks poised to continue in the future.
Here's why this shift could be the under-the-radar catalyst that leads to Bitcoin's continued success in the coming years and decades.
Image source: Getty Images.
Why Bitcoin is volatile
To start, let's look at why Bitcoin experiences such dramatic price fluctuations. First, it is traded internationally 24 hours a day, seven days a week. It isn't limited to set hours like the stock market. With people all over the world trading at all hours of the day, substantial swings can and do occur.
Second, Bitcoin is a relatively new asset. With limited historical data, the market struggles to assign an accurate price, which can also lead to sudden price swings. Unlike traditional assets, which have a history of finding fair value in particular economic conditions, Bitcoin is constantly under pressure to find a more accurate valuation depending on market sentiment, recent news events, and investor behavior.
Although Bitcoin remains more volatile than traditional assets like stocks or bonds, there is a clear trend that its volatility has been tempering since the cryptocurrency was invented in 2009, with a considerable decline since 2022.
But why is this and how can it benefit investors?
A substantial shift
There may be several reasons Bitcoin is becoming less volatile.
One of the primary draws of Bitcoin for investors is its use as a store of value. Many investors are now treating Bitcoin as a long-term investment option, rather than a short-term speculative asset. As more people start holding on to their Bitcoin for longer periods of time, the demand for Bitcoin will become more stable, resulting in less price volatility.
In addition, the Bitcoin market is maturing. The world's first cryptocurrency is no longer just a niche investment alternative for a few tech-savvy investors. It's now a mainstream investment option for millions of people and even some institutions.
The combination of these factors helped Bitcoin's total market cap rebound and stabilize after plunging last year. The market cap size alone -- now at almost $600 billion, bigger than all but a handful of companies -- makes it harder for large traders or institutional investors to swing the price of Bitcoin, which in turn has reduced its volatility. In other words, the larger Bitcoin's market cap becomes, the harder it is for large buy or sell orders to have an effect on the price.
The opportunity at hand
So why is the decreasing volatility of Bitcoin a good thing for investors? Well, quite simply, it turns the narrative of high volatility on its head. Rapidly fluctuating prices have been one of the primary reasons risk-averse investors shied away, but as Bitcoin's volatility decreases, its risk profile becomes more akin to that of other traditional assets that are found in most portfolios. In time, the cryptocurrency could become a more attractive option for portfolios of all risk levels.
Even better, as more investors begin to see Bitcoin as a legitimate asset class, the demand for the cryptocurrency should continue to grow, which will in turn not only help to stabilize its price but cause it to rise as the pressures of increased demand meets Bitcoin's finite supply of 21 million coins.
This won't happen overnight, but data show Bitcoin's volatility has been diminishing over the years. Ahead of the day when Bitcoin becomes a legitimate asset for investors of all risk levels, it makes investing today a promising opportunity with the cryptocurrency still almost 60% below its all-time high.
