Is Bitcoin an alternative to the traditional fiat currency? Like Gold, does it have any storage of value? No. At the beginning of 2017, the BTC-USD exchange rate was just close to $1000. In December 2017, the value of 1 BTC was approximately $20,000. Just make a rough calculation on how much the value has increased within a time span of one year. At the time of writing this post, the dollar-bitcoin exchange rate is 1 BTC = $8081. Why the price of bitcoin is volatile and fluctuating so often? Who is controlling the price of bitcoins? What is the reason for the fall and rise of bitcoin value? Like, this so many questions will arise in the mind of many people who are following the news related to bitcoins and other cryptocurrencies regularly. Let's try to find some reasons for the volatile nature of the bitcoins.
# Buying/selling bitcoins
Whenever someone is buying a BTC on the exchanges using the fiat currency or other cryptocurrencies, a transaction is initiated on the blockchain network. This makes the value of bitcoins to rise because of the limited number of bitcoins that can be mined. As per the bitcoin protocol developed by its founder Satoshi Nakamoto, the maximum limit for the number of bitcoins that can be mined is only 21 million. More than 14 million bitcoins had been mined already and 7 million coins are remaining. If the demand for a product increases while its supply is limited, then it is quite natural for the price of the product to go up. In a similar manner, when someone sells the bitcoins through exchanges or other means, then also a transaction will be initiated on the blockchain network. Generally, it is said that the merchants who accept bitcoins as payments will convert them to fiat currencies immediately. Because they don't trust that the value of the bitcoins to be constant which will cause the value of bitcoin to decrease.
# Government regulations
Till now, the world of cryptocurrency is unregulated and not controlled or governed by any single authority. The bitcoins and other cryptocurrencies are not accepted as a universal form of payment system yet. But, many governments have started taking steps towards the regulation of cryptos in their country. For example, in countries like Nepal, Pakistan, and Bangladesh the usage of bitcoins is completely banned whereas in countries like Indonesia, Cambodia etc you can use bitcoins for trading but not as a payment option. So, whenever the governments make any change in the existing policies or regulations, the value of bitcoins will rise or fail based on the nature of the new regulations.
# News / Social media
There is nothing called "guarantee" in the crypto world. Because any investment related to cryptocurrencies always carry a significant amount of risk and the investors should be aware of that fact very much. You might have heard about the BitFinex exchange hack that resulted in a loss of approximately $70 million worth bitcoins to the investors. This kind of negative events will affect the value of bitcoins because the investors will be rushing to exchange their coins to fiat currencies. Likewise, negative sentiments about the cryptocurrencies on social media networks like Twitter, Facebook will also affect the value of bitcoins. A few years back, only a few big players were holding the large portions of the bitcoins. But, things have changed now as not only individuals but also institutional investors have turned their attention towards bitcoins. If more merchants, companies, and governments will start accepting cryptocurrencies as a payment option, then the price of the bitcoins will become more stable. Till that happens, the volatile nature of the bitcoins is unavoidable.