Why did bitcoin prices crash? 4 factors that determine its volatility
Economists have long had a
notion that psychological factors affect investor decisions
LATEST
NEWS : The price of
Bitcoin has dropped to around A$8,000 in the last few days, after
almost hitting A$10,000 in the past month, and rising over 1,850% since 2015.
All of this shows how volatile the currency is, prompting the question, what
leads to such huge movements?
Our ongoing research reveals four factors that affect the
price of Bitcoin. These include media hype and uptake by peers, political
uncertainty and risk (such as the election of Donald Trump or the vote for
Brexit), moves by governments and regulators, and the governance of Bitcoin
itself.
It is likely the last factor that has driven the latest drop
in the price, as a proposed Bitcoin split (or “fork”) failed to gain support
from developers towards the end of last week. The split would have doubled the
number of coins in circulation (as previous splits have) and increased
transaction speed.
1) Animal spirits
Economists have long had a notion that psychological factors
affect investor decisions. This is called “animal spirits” and refers to
investors making decisions based on the behaviour of other market participants
and their own intuitions, rather than hard analysis.
Analysis of the price of Bitcoin shows that positive media
coverage is one of the main factors driving the price.
Positive media coverage of new technologies causes a well-known
hype-cycle – a peak of hype is followed by a “trough of disillusionment”.
This was most apparent in the early days of Bitcoin, when
mainstream press started to report on the new currency and caused a number of
short price spikes and collapses. As media coverage increases and other factors
are brought in, it is harder to distil the effect of the media alone.
Something similar happens when high-profile companies go
public, as investors “pile in” and the value rapidly increases from a low base.
Think of a company like Twitter, which saw a huge sharemarket “pop” when it
went public.
Comments
Post a Comment