An important reminder that will help you better understand the volatility of the Bitcoin price.
Bitcoin is the world's only truly free market. This means that Bitcoin users can find its equilibrium price 24 hours a day, 7 days a week, 365 days a year.
Trading never stops in the Bitcoin world. Volatility is a feature, not a bug with Bitcoin. You should be prepared to see drops of -20% or more in a few hours, and increases of that much in a few hours as well.
Of course, it's always easier to control your emotions when the price of Bitcoin is soaring, but still, beware of the FOMO effect that could distract you from your predefined strategy.
With this in mind, you can see that there are many reasons why the price of Bitcoin can fall sharply at times.
1. Geopolitics plays an important role.
When Donald Trump raised doubts about America going to war with Iran in early January 2020, the price of Bitcoin took a hit, as did all other liquid markets. Bitcoin is no exception to the rule in this kind of situation.
2. The macroeconomic context.
When the COVID-19 pandemic took over the world in March 2020, we saw a liquidity crisis on all the liquid markets that caused what is known as Bitcoin's Black Thursday. The price of Bitcoin lost more than 50% of its value in a few hours to hit the 2020 low of around $3.6K. A strong rebound was then seen thanks to the Bitcoin HODLers of last resort who took the opportunity to accumulate more.
In September 2021, when the Evergrande affair came to the forefront, panic gripped the financial markets as they imagined a Lehman Brothers scenario with a potential global financial crisis due to a default by Evergrande. The mainstream media fanned the flames of this possibility to scare investors, and this caused all liquid markets to fall, including Bitcoin of course.
Once investors took the time to analyze what was going on, calm returned, and the price of Bitcoin resumed its rise. This just goes to show that it's essential to take a step back in these situations to avoid getting caught up in the events.
3. Regulatory risks.
When America hints at strict regulation negative to Bitcoin and the cryptocurrency world, the market reaction is not long in coming.
Those who are in this world just for the money sell their BTC out of fear. Those who are in it to take power over the fruits of their labor understand that this does not change what is in store for the Bitcoin revolution in the long run.
This is essential in these situations. The more confidence you have in bitcoin, the less you will be affected by these events that add short-term volatility to the Bitcoin price.
4. FUD.
China announces a ban on Bitcoin. This may be a recurring event that comes around every 6 months, but the less seasoned investors get caught out every time. This triggered a drop of more than 40% in the price of Bitcoin in May 2021, with the price falling to just under $30K. Everyone imagined the worst for the Bitcoin network's Hash Rate. Yet, as always, Bitcoin proved to be antifragile.
The Bitcoin system has continued its march forward. Now America dominates Bitcoin mining, while China will regret this strategic mistake in the future in my opinion.
FUD can also consist of rumors spread on social networks by some to make you panic and sell your BTC at a loss. Here again, only one motto to apply: “Don't Trust, Verify”.
5. Lack of trust in Bitcoin.
When the various events I mentioned above occur, the lack of confidence in Bitcoin by some people can lead to a massive sell-off, which causes the price of Bitcoin to fall sharply.
6. Large-scale profit-taking.
The question arises for $100K: what will happen when the price of Bitcoin reaches $100K?
Will we see a flight to the moon in the price of Bitcoin, or a major correction due to the profit-taking of all those who have been waiting for months for this?
The question arises, and I am curious to see what will happen at that moment. I admit that I cannot make a prognosis. I don't know if reaching this milestone will serve as an instant catalyst to go much higher, or if we will see a major correction.
That's what makes this market so exciting to follow daily.
We can also see that profit-taking by a large, well-known investor, as was the case in the first quarter of 2021 when Tesla sold part of its Bitcoin to prove the liquidity of its strategy, can harm the price of Bitcoin.
Many will tend to overreact by imagining the worst which will lead to panic selling. As always in these situations, you need to take a step back.
7. A hack of the Bitcoin network or a major bug that would call the Bitcoin revolution into question.
Fortunately, the Bitcoin network has never been hacked since its creation. There has only been one major bug that has rendered the network inactive for a few hours. Newcomers to the Bitcoin world probably don't know this, but on August 15, 2010, a bug in the Bitcoin blockchain created over 184 million BTC!
Known as the “Value overflow Incident”, this bug concerned block 74,638 of the Bitcoin Blockchain. Within it, a transaction was present creating 184,467,440,737.09551616 BTC for 3 different addresses. Thus, 2 addresses each received 92.2 million BTC while the miner solving the puzzle related to the block was rewarded with 0.01 BTC that did not exist before the transaction.
This bug was made possible by the fact that the code used by the Bitcoin Blockchain to verify transactions before including them in a block did not take into account the case of amounts so large that they exceeded the limit of the number of Bitcoins when added together.
A new corrective version of the Bitcoin Blockchain was released by Satoshi Nakamoto and another developer in just 5 hours after the bug was discovered. The Blockchain then had to be forked to reject the offending block. While several unpatched nodes continued to add blocks to the bad version of the blockchain, the good version of the Bitcoin blockchain took over from block 74,691.
From this block on, all nodes accepted the patched version of the Bitcoin Blockchain as the authoritative one for transaction history. Thus, block 74,638 no longer exists for users using the longer blockchain as a reference.
Apart from this bug, which has been corrected very quickly, the Bitcoin network has never been unavailable, which allows it to display an uptime of more than 99.985% since its creation. An uptime that has nothing to envy to those of the Web giants like Google or Facebook in my opinion.
That said, if this were to happen again, or if a hack were to be made on the Bitcoin Blockchain, then you could expect some serious shocks to the price of Bitcoin.
To prevent this from happening and the Bitcoin revolution from being called into question, everything is done to ensure that Bitcoin evolutions are put into production when everything is tested. That's why Taproot took so long to arrive. That's also why everything went well when Taproot was activated on the network.
8. Failure to follow the rules of the Bitcoin protocol.
The Bitcoin revolution is powerful because all users can verify at any time that the 4 essential rules of the Bitcoin protocol are still respected. If the rules of the Bitcoin protocol were to be broken, so would the Bitcoin revolution.
These 4 key rules are:
- No monetary inflation.
- No confiscations.
- No censorship.
- Anyone can verify rules 1 to 3 at any time.
This would affect the price of Bitcoin, but rest assured that this is not on the agenda.
Final Thoughts
As you can see, there are many reasons why the price of Bitcoin could fall. It is because Bitcoin is a free market that all the events that influence the psychology of investors can have such an impact on its price.
You need to know what to expect when you enter this market, so you understand that taking a step back is essential. Once you understand the why of Bitcoin, you can then adopt a long-term strategy.
This will protect you from falling into the trap of the FUD or FOMO emotional warfare that causes some people to make decisions that are not based on their sense of logical reasoning. The worst thing in the investment world.
In Bitcoin We Trust Newsletter: Everything around Bitcoin, Blockchain, and the cryptocurrency market