what is driving Bitcoin's price? why does Bitcoin change value? why is the price so volatile?

Why does Bitcoin change value? Why is the price so volatile?

The value of a bitcoin is tied purely to the laws of supply and demand. In other words, the price is determined only by what the market is willing to pay. If more people want to buy bitcoins, then the price will increase. If more people want to sell, the price will decrease. 
Bitcoin’s value can be volatile when compared to more established currencies and commodities. This can be attributed to its relatively small market size, and it means that a smaller amount of money can move the Bitcoin price more significantly. This discrepancy will decrease naturally over time as the currency matures and the market size increases. 
For merchants wishing to accept bitcoin now, Coinbase provides a way to avoid volatility altogether by instantly exchanging bitcoin payments to your local currency.
Bitcoin reached a record high on Tuesday, climbing above $2,900 for the first time. That’s more than double the price at the beginning of May, and an incredible 500-fold increase over the past five years.
For Americans, the soaring value might seem like a puzzle, since it doesn’t seem like the payment network is any closer to mainstream acceptance here. But experts tell me that the currency’s recent growth is driven by soaring demand in Asia.

we think speculation in the primary driver

“Based on the data we've collected, we think speculation in the primary driver,” said Garrick Hileman, a Bitcoin expert at the Cambridge Center for Alternative Finance, in an interview in late May. Hileman says that surveys show most users buying and selling bitcoin for speculative purposes rather than to buy things or send cash to other people.

The big question, of course, is why the market suddenly got so optimistic about Bitcoin’s future. One factor is the Japanese government formally recognized the cryptocurrency in April, giving it greater legitimacy in Asia’s richest major economy. There’s been steady growth of international money-transfer services that use Bitcoin to move cash from one country to another.

Bitcoin has also been in the news recently because the authors of ransomware often demand Bitcoin payments from victims. That’s not great for the cryptocurrency’s image, but it might nevertheless be driving demand upward.

If history is any guide, the latest surge in Bitcoin’s price is likely to end in tears for many of the people who are frantically buying up the virtual currency. There have been three previous times when Bitcoin’s value soared like this — once in 2011 and another in 2013. Each boom was followed by a dramatic crash.

early Bitcoin booms were 

Those early Bitcoin booms were US-centric, but Bitcoin has become more international since 2013. And data suggests that the big boom we’ve seen over the past month has been driven by surging demand in Asia.

The most dramatic illustration of this is the fact that the value of Bitcoin reached a high of 5 million won in South Korea on May 25, the equivalent of about $4,500 and far higher than the US price of around $2,700 at the time. The price of Bitcoin in Japanese yen was been about $300 higher, on average, than the price in US dollars at the time.

This kind of big spread between currencies doesn’t happen in mature currency markets. Traders are supposed to capitalize on the arbitrage opportunity — buying in one market and selling in the other until the price gap goes away.

But Adam White, the head of a Bitcoin exchange called GDAX, said that this hasn’t happened rapidly enough in the fledgling Bitcoin market. Traders who buy bitcoins with dollars and sell them for South Korean won have to find a way to convert the won into dollars. Regulatory and logistical obstacles prevent them from doing that quickly enough to meet surging demand for bitcoins in South Korea.

The spread between bitcoin’s value in dollars and in its value in yen and won has narrowed in the last two weeks. Still, there continues to be intense interest in the virtual currency in Japan and South Korea.

Hileman points to Japan’s formal recognition of Bitcoin as a significant factor behind this boom. Bitcoin has long enjoyed de facto recognition from governments around the world. But the Japanese legislature went a step further and passed rules specifically spelling out how Japanese financial regulations would apply to Bitcoin and other cryptocurrencies.

That will prompt Japanese businesses to give the technology another look, giving it a further sense of momentum.

international money transfers

One of the most obvious applications for Bitcoin is in international money transfers. Conventional money transfer networks like Western Union and MoneyGram are slow and expensive. A variety of startups have been building competitors based on Bitcoin.

One example is Bluepan, a South Korean company that helps migrant workers in Japan and South Korea send funds back to their families in the Philippines and China. Bluepan says it has processed $65 million in payments over the past two years, and data provided by the company show a five-fold increase in both the number and value of transactions over the past 18 months.

Of course, $65 million is still a tiny share of the global market for international money transfers. But people are betting that lower fees and faster transactions will allow companies like Bluepan to expand their market share over time.

“Remittance companies are experiencing month-over-month growth of 10 to 20 percent,” says Chris Burniske, a Bitcoin analyst at ARK Invest. “They provide a better service for cheaper.”

The authors surveyed 48 companies providing services based on cryptocurrencies (predominantly Bitcoin). The chart shows the fraction of these companies’ customers in each region of the world for various types of Bitcoin businesses. Asia dominates the money transfer business and is well represented in other types of Bitcoin businesses.

Interestingly, North America represents a small fraction of the customers in all categories, and money transfer services have hardly any North American customers at all. A big reason for this may be that the global financial system is largely based on the US dollar, making transfers between dollars and other currencies cheaper and easier than sending money between two non-dollar currencies. That leaves less room for Bitcoin-based services to undercut conventional money transfer services in the United States.

ransomware is giving Bitcoin an unwelcome high profile

Another factor that may be driving interest in Bitcoin is the proliferation of ransomware. That’s malicious software that scrambles all the data on a victim’s computer and then demands a payment to unscramble it. Ransomware authors like Bitcoin because the network doesn’t have an owner who can reverse ransomware payments or help authorities track down their recipients.

“I've seen varying estimates of how much money has been fleeced from ransomees,” Hileman tells me. Some people think that victims have paid hundreds of millions of dollars, he says, but it’s hard to collect accurate data about an underground criminal activity.

Bitcoin fans don’t like to talk about the networks’ illicit uses, which also include ordering illegal drugs on underground websites. And it seems likely that it would be had for Bitcoin’s long-term reputation if it became known primarily as a medium of exchange for extortion and drug dealing.

At the same time, there’s little doubt that media coverage of recent ransomware attacks has raised Bitcoin’s profile, which may have inspired some people to learn about the currency and consider buying some for themselves.

no one knows how much bitcoins should be worth

All of these applications contribute to the overall demand for Bitcoin, but Hileman emphasizes that recent price increases are driven by speculation, not practical uses of the currency. A growing number of people are becoming convinced that Bitcoin’s price is going to go up in the long run. And this has become self-fulfilling prophesy.

They aren’t necessarily wrong. The value of all bitcoins in existence is about $45 billion, a relatively small sum in a world where people have tens of trillions of dollars invested in stocks, bonds, gold, and other assets. If bitcoin becomes a de facto global standard for transferring money across borders, that could justify optimists’ hopes.

Another possibility is that Bitcoin will simply become a popular store of value much like gold. People use gold for jewelry and electronics, of course, but mostly gold is used as a way to store wealth outside the reach of conventional financial institutions. Bitcoin has a much shorter track record than gold, but it has some advantages too: It’s easier to store and can be transferred around the world with the click of a button. The world’s gold supply is worth trillions of dollars.

It’s also possible that the latest price rise is a mere speculative bubble. People might simply be buying bitcoin with an expectation that they’d be able to sell it at a higher price. For a while, that can push prices higher and higher. But eventually the process runs out of steam and starts to go into reverse, causing a panic.

That’s what happened in the spring of 2011, when Bitcoin’s price went from less than $1 to more than $30 in a matter of weeks, only to fall below $3 in October. There were two more bubbles like this in 2013 — one in April and the other in November. Each was followed by a crash.

On the other hand, in each case the currency eventually recovered and went on to set new records. Maybe they weren’t really bubbles after all.

Either way, it’s clear that Bitcoin is one of the riskiest investments anyone can make. If you buy it at today’s historically high prices, you could easily lose most of your investment in a matter of weeks.