From Market Sentiment To Technical Challenges, Revealing The Underlying Reasons For Bitcoin Price Fluctuations

by Loraine Schultz on Feb 12th, 2025 20:25 PM

As the world's most well-known cryptocurrency, the price volatility of Bitcoin has always been a focus of investors' attention. Since its inception in 2009, the price of Bitcoin has experienced multiple drastic fluctuations, becoming a major "hot spot" in the market. So, why is the price of Bitcoin so unstable? This article will analyze the fundamental reasons for bitcoin price fluctuations from multiple dimensions and attempt to uncover the underlying underlying factors.

The fluctuation of Bitcoin price is closely related to investors' market sentiment. Due to the fact that the Bitcoin market is still relatively young compared to traditional financial markets, lacking sufficient mature mechanisms and stable investment foundations, investor sentiment has a more significant impact on market prices. Especially in the absence of sufficient fundamental support, market sentiment often becomes a key factor determining the rise and fall of Bitcoin prices.

For example, during a bull market, investors generally hold an optimistic sentiment, expecting the future value of Bitcoin to continue to grow, which often leads to a large influx of funds into the market, thereby pushing up the price. During bear markets, market sentiment quickly turns pessimistic, with investors selling off their Bitcoin holdings, leading to a significant drop in price. Therefore, the price fluctuations of Bitcoin are largely driven by market sentiment.

The supply of Bitcoin is limited, with a total set at 21 million coins, which gives Bitcoin the ability to resist inflation in the long run. However, this supply constraint also makes the Bitcoin market more susceptible to changes in demand. In the short term, drastic fluctuations in demand can directly cause drastic price fluctuations.

In addition, there is a special mechanism for the supply of Bitcoin - halving. Every four years, the mining reward for Bitcoin is halved, resulting in a significant decrease in the number of new Bitcoin additions in the market. When a halving event occurs, investors usually buy in advance due to market expectations of a decrease in supply, leading to an early rise in prices. After halving, if market demand fails to keep up with the speed of supply reduction, it may lead to short-term price fluctuations. Therefore, the supply and demand relationship of Bitcoin is more uncertain compared to traditional assets, further exacerbating its price fluctuations.

The underlying technology of Bitcoin, blockchain technology, although innovative and breakthrough, also faces some technical challenges. These technical challenges may have a direct impact on the price of Bitcoin.

Firstly, the processing speed of Bitcoin transactions is relatively slow, and transaction fees are high. During network congestion, transaction confirmation times may be extended, leading to investor dissatisfaction and market panic. This technological limitation often leads to the market's trust in Bitcoin being shaken, thereby affecting the stability of the price.

Secondly, the mining process of Bitcoin also faces technological bottlenecks. As the difficulty of mining increases, more and more computing power is being invested, which also leads to a continuous rise in the mining cost of Bitcoin. In some market environments, high mining costs may lead to some miners withdrawing from the market, thereby having a negative impact on the price of Bitcoin.

The price fluctuations of Bitcoin are closely related to the regulatory policies of governments around the world. Due to the decentralized nature of Bitcoin and other cryptocurrencies, many countries and regions have adopted a cautious regulatory attitude towards them. Changes in regulatory policies, especially the introduction of negative policies, often cause market anxiety, leading to significant fluctuations in Bitcoin prices.

For example, in 2017, the Chinese government implemented a closure policy on the Bitcoin exchange, which triggered severe fluctuations in Bitcoin prices. Similar incidents have occurred multiple times, especially in major economies around the world where government regulatory policies for the cryptocurrency market are constantly changing. When certain countries announce restrictions or complete bans on Bitcoin, the market often experiences panic selling, leading to a sharp drop in Bitcoin prices.

In recent years, an increasing number of institutional investors have entered the Bitcoin market, which has had a profound impact on the volatility of Bitcoin prices. Compared to individual investors, institutional investors have a larger amount of funds and more systematic trading behavior. Therefore, the decisions of institutional investors often have a more significant impact on the Bitcoin market.

The participation of institutional investors can enhance the liquidity and stability of the Bitcoin market, but on the other hand, their risk appetite and speculative behavior may also exacerbate price fluctuations. For example, when some institutional investors engage in large-scale selling, it may trigger panic in the entire market, leading to a sharp drop in the price of Bitcoin. When institutional investors buy in large quantities, the price will quickly rise, forming significant price fluctuations.

The instability of Bitcoin price is the result of multiple factors working together. Market sentiment, supply and demand relationships, technological factors, regulatory policies, and the participation of institutional investors all affect the volatility of Bitcoin prices to varying degrees. Despite Bitcoin's unique advantages as a decentralized digital currency, its high volatility in price remains one of the main challenges for investors. In the future, with the maturity of the market and the gradual improvement of regulatory environment, the volatility of Bitcoin price may be alleviated, but its inherent uncertainty will still exist for a long time.