There’s no shortage of explanations in the community as to what makes bitcoin volatile, but if you ask Citigroup currency specialist Steve Englander, he’ll telling you a contributing factor has to do with bitcoin mining.
Specifically, the costs associated with mining (that is, the money being invested in new mining technologies, rigs, etc.), which he says makes bitcoin “volatility inevitable.”
The information comes from a note released on Tuesday, in which Englander writes (via Barron’s):
[blockquote style=”2″]Bitcoin mining has evolved from cottage industry to heavy industry over the last couple of years and mining equipment has become very expensive. This may add acute instability to Bitcoin price dynamics because of an imbalance between supply and demand…If miners pay out a lot for their equipment, the more the initial outlay, the bigger the incentive to sell quickly any Bitcoin that they mine into the market in order to recoup their investment. So we have daily transactions volume of 60-100k in recent months, with volumes higher in periods of falling bitcoin prices. Many and possibly a majority of these transactions are shuffling Bitcoin between wallets. About 3.5k Bitcoin are mined daily. If the miners are a steady source of supply and there is no increase in final demand we have this overhang of Bitcoin being sold into the market. In consequence we have downward price pressures. This may change if there is some pickup in demand for Bitcoin, but for now we have miners looking to sell and not much of anyone looking to buy. The market structure I am describing inherently generates extreme volatility. Bitcoin advocates often describe volatility as a growing pain but in fact the cost structure of Bitcoin mining may make this volatility inevitable.[/blockquote]
Of course, some in the community might disagree with Englander’s statement, but the fact of the matter is that at least somebody at the mega-bank is studying bitcoin at some level.
After all, this up-and-coming technology is slowly finding its ways into the hands of consumers around the world. Thus far, a number of large businesses accept bitcoin, including DISH Network, Dell, and Overstock.com.
Most of the business that accept bitcoin convert it immediately to fiat.
At this time of this writing, the price of bitcoin is $513 at the BitStamp exchange, down 12.44 percent in the past thirty days.