Due to the highly volatile nature of bitcoin, many investors have snubbed bitcoin. From the statistical data, one can clearly see how fast the value of bitcoin has changed since it was introduced e.g. in the year 2017, its value upsurged to 5000 USD in September 2017 from about 1000 USD at the start of the year. Not only that, its price almost quadrupled in the next three months, that is, in December 2017 it rose to a staggering value of 19650 USD. In December next year, it crouched down to only 4000 USD. These crests and troughs in the value of bitcoin might be seen by people as a huge risk but in reality, this very volatility might be the base of profits.
Volatility is not as bad as it is seen by a majority of investors. Instead, it is a great opportunity for short term investors to obtain substantial profits via a buy-and-sell method. By predicting the value trends in bitcoin, they usually outperform those investors who keep a buy-and-hold scheme in profits. The main question that arrives at this point is ‘how does this all work?’. How does volatility function?
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The answer to it is indeed very simple. Basically, as the value of bitcoin increases, it becomes more relevant to new people. An increasing value of any product attracts people like a magnet. The same goes for bitcoin as its price rises, more people get interested, they study it and invest in it. As more people buy it, the price goes even higher. A cycle, thereof starts which creates waves of the value of this product. These waves move up as demand increases and move down as more people sell it. Also, the small a market share is, the high is its volatility, as is the case with bitcoin. This very high volatility of bitcoin right now foretells how big of a profitable impact it is going to have in the future. That means, as more people get interested in it, the greater will be the rate of increase in the value because the adoption rate is not that high currently.
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Metaphorically speaking, imagine throwing a big rock into a small tub full of water. The splash will be very significant. This very splash resembles the high volatility and a high rate in the increase of value due to a small adoption rate. Now imagine throwing the same rock in a huge pond. The effect will be less right? So basically, this high volatility is actually the base of very high-profit margins. As it decreases, the prices do get stable but also decrease the profit margins an investor can attain. Remember, there is always volatility in everything. It’s up to you how you grasp it and use it to your advantage.