Is human irrationality to blame for Bitcoin’s fluctuating prices?
Over the course of its 12-year history, Bitcoin (BTC) has gone through several ups and downs, each time a little more violent than before. But what is behind these price cycles? Decred co-founder Jake Yocom-Piatt believes that the answer to this question is the way the human mind works.
„The up and down cycles of Bitcoin are pure human psychology, there it concerns attention spans in interaction with the increasingly smaller becoming offer of the crypto currency“, as Yocom-Piatt explains to Cointelegraph to that effect.
Over the years, crypto-experts have proposed a variety of theories for the evolution of Bitcoin’s price cycles, including the popular stock-to-flow forecasting model, which calculates the price based on the amount of stock in circulation (stock) relative to the rate of increase of the amount of stock in circulation (flow).
This approach reflects an important feature of Bitcoin, as the rate of increase of the stock in circulation is literally halved every four years during the so-called „halving“ process. The artificial scarcity of the crypto currency is thus fixed in its programming code, with the final upper limit of the amount in circulation being 21 million BTC.
„The rate of increase of the amount of Bitcoin in circulation is becoming smaller and smaller in percentage terms, and in addition there is a considerable supply shock with each halving,“ as Yocom-Piatt explains.
„Upward trends always occur when demand is greater than supply, which drives the price up, and this in turn attracts the attention of shortsighted investors. After a certain time, however, the attention of these shortsighted investors dwindles and the uptrend turns into a downtrend. With each upward trend, the overall attention for Bitcoin increases, paving the way for the next upward trend.
Bitcoin had recently climbed almost to the previous record high of 2017, which is just under $20,000. In fact, the attention for the crypto currency was fueled by the fact that the mainstream media are also currently reporting on it again.