Many people have questioned whether it is safe to invest in cryptocurrencies due to their volatility and history of "boom and bust" cycles. After hitting a record high of $69,000 in November 2021, the price of bitcoin, the most widely used cryptocurrency, is currently around $20,000. What's driving the supposedly decreasing trend of digital currency?
Why Bitcoin is volatile
Bitcoin's bubble burst
Will bitcoin recoup?
Bitcoin is highly erratic, rapidly increasing and plunging every day. However, it's not the only cryptocurrency to have seen recent instability.
A decline in global stocks has occurred as a result of the war in Ukraine, inflationary fears and higher interest rates, which make borrowing money for businesses more expensive. This has spread to the market for cryptocurrencies.
Cryptocurrency prices fell below $1 trillion for the first time since January of last year. Celsius Network, a significant US bitcoin loan organisation, halted withdrawals and transfers in June 2022. Another factor is China's ongoing crackdown on cryptocurrencies and rumours that crypto activities in Russia may cease.
Bitcoin has no underlying asset, in contrast to conventional investments like stock, whose price movements may very well be impacted by the success of the firm.
This indicates that changes in its price are solely driven by investor conjecture about whether it will increase or decrease in value in the future. As a result, the price of bitcoin might fluctuate drastically, even within a single day. People are currently selling their cryptocurrencies to lower their investment risk due to excessive inflation and a problem with the cost of living.
Additionally, there have been some negative and positive events that impacted the price of bitcoin.
Several negative stories and threats of further regulation have pushed the price of bitcoin down.
These include:
Celsius Network halted withdrawals and transfers due to "extreme" circumstances.
In June 2022, Binance, one of the biggest cryptocurrency exchanges in the world, halted bitcoin withdrawals, citing a "stuck transaction" as the reason for the backlog, according to Changpeng Zhao, CEO of Binance.
It was suggested that Russia prohibit cryptocurrency activities early this year. There were requests for cryptocurrency exchanges to prohibit Russian transactions, after the invasion of Ukraine.
In June 2021, banks and payment companies in China were instructed to stop cryptocurrency transactions. In September 2021, all cryptocurrency transactions were deemed unlawful by the governments of China and the US.
HSBC and Santander were the first major banks to suspend payments to Binance. The International Monetary Fund (IMF) has warned that using cryptocurrencies as legal cash could put financial stability at risk. Last year, a hacker stole $600 million from Poly Network, a platform that deals in digital currency.
But there have been more positive stories, and these have given the bitcoin price some protection over the past year:
Morgan Stanley was the first major US bank to provide wealthy clients access to bitcoin funds in March 2021 but limits the investment to not more than 2.5% of the investor's entire net worth.
Elon Musk said US electric vehicle manufacturer, Tesla will likely resume accepting bitcoin payments in June 2021, a month after causing a crypto sell-off, as more than 50% of its energy use came from renewable sources.
In July 2021, Amazon advertised a position for a "digital currency and blockchain product lead," sparking rumours that it will soon start taking bitcoin as payment.
Bitcoin became legal money in El Salvador last September.
The US Federal Reserve has been debating whether to introduce its own central bank digital currency (CBDC). US President Joe Biden signed an executive order in March to coordinate the US government's efforts to regulate digital assets.
Given the collapse in prices brought by the investors' loss of confidence in the cryptocurrency market, it appears that the bubble surrounding bitcoin has burst.
The price increased by more than 700% in only one year in 2021, reaching a record high of $69,000 in November.
In June 2022, it fell to under $18,000.
Last October 2022, it was still under $20,000.
When the price of an asset rises swiftly and reaches a record high, a crash or at the absolute least a correction—when the price drops back down to a more "normal" level, becomes far more likely.
It seems that this is the state of bitcoin at the moment.
2013 was a pivotal year for cryptocurrency investors. The price of bitcoin increased from $13.40 at the beginning of the year to its peak of $1,156.10 in December before dropping to approximately $760 three days later. It is also uncertain where it will go next.
There are no assurances in investing. Bitcoin might rise again just as swiftly as it falls. Numerous worries concerning cryptocurrencies are dimming their prospects. The repression in nations like China, worldwide calls for stricter regulation, environment-related issues, concerns with security and hackers, as well as pricing is completely dependent on conjecture.
The decentralisation of crypto is viewed as being threatened by further regulation, which affects the pricing of digital currencies.
Fans of bitcoin highlight benefits such as:
Technology that might revolutionise several sectors
Simpler and less expensive transactions by removing "middle parties" like banks
Global trading would be simpler, without worries about exchange rates with non-fiat digital money.
The transactions are more private.
Because it cannot be printed or confiscated, it is a secure way to keep value.
Bitcoin has been promoted as a replacement for gold, thus it can be an effective hedge against inflation.
Given its volatility, it's feasible that bitcoin will in the future regain its momentum, perhaps weeks, months or even years down the line. But no one has a crystal ball and predicting the future of bitcoin is challenging due to its speculative character.
Learn more about investing with cryptocurrency and the pitfalls to avoid. If the stock market declines, will bitcoin increase? Possibly not.
Bitcoin is viewed as a diversifier in balanced portfolios by its proponents, although it performed no better than equities at the onset of the coronavirus outbreak. Investors liquidated everything in a panic, which is why Bitcoin saw a 40% decline in the first two weeks of March 2020.
“That was when we saw all equity markets take an aggressive leg down because of concerns about COVID-19,” said Rosie Bullard, partner and portfolio manager at James Hambro & Partners. “So it wasn’t exactly a store of value in an equity market reversal.”
“If you look back to March of last year when we saw the market collapse, you didn’t see bitcoin suddenly rally in that period,” Bullard said.
Having said that, the reason for the collapse of the financial markets will affect how crypto assets perform when the stock market crashes. Most bitcoin investors think it would offer security if it were all about an inflationary crisis, like what occurred in 1974.