Why is the number 1 Crypto currency so volatile and how to reduce risk?


As Bitcoin is a relatively new asset as compared to traditional stock markets with roughly three decades of history in the Indian market and around 10 decades in the US markets, the adoption and liquidity are low which results in high vulnerability to manipulation by whales, a term referred to the large scale bitcoin holders.

No fundamental Metrics to Assess the Intrinsic Value of Bitcoin

Like any other currency, Bitcoin’s value is derived from the supply and demand characteristics and unlike any stocks, it does not have clearly defined fundamental metrics such as Balance Sheet, Income Statement and Investor Presentation for investors to analyze.

However, there are certain fundamental factors such as adoption by countries and technical factors such as hash power, mining complexity, transaction speed, etc. which are constantly talked about by pundits and intangibly linked to the Bitcoin price. Still, there is no tangible correlation that has been built with the price to establish conclusively, whether Bitcoin is under or overvalued at any point of time.

Fragmented Ecosystem

Unlike stock markets where a stock trades on a few exchanges, bitcoin currently trades on ~400 exchanges. This causes liquidity to get trapped in these individual exchanges. As a result, every time someone wants to buy/sell a large amount of Bitcoin, prices move significantly which causes volatility.

Low Institutional Participation in Bitcoin Ecosystem

Lastly, but perhaps the biggest reason for high volatility in Bitcoin price is that still bulk of the Bitcoin holdings sit with retail investors, who are more emotional and short term in nature as compared to the institutions. Bitcoin has been an exceptional asset class where retail investors were the early adopters and institutions are now waking up to this technology. While some retail investors have remained HODLers and continue to support the Bitcoin lows, a bulk of retail segment has relatively low holdings and are the first ones to panic sell in tough situations