Bitcoin (BTC) had a rough start to the year. Its price has fallen more than 35% since its peak in November, according to data from CoinMarketCap. On January 10, it fell below $40,000 – the lowest since September. It has gained some ground since, but is struggling to break through.
Many crypto investors wonder if we are close to the bottom, and if so, if the king of cryptos is about to soar. To answer that, we need to look at why Bitcoin fell in the first place and what factors could push it back up.
Why did Bitcoin fall?
This isn’t the first time we’ve seen dramatic Bitcoin price declines, and it won’t be the last. Cryptocurrency is an extremely volatile and unpredictable investment, and these declines are an integral part of investing in cryptocurrency. But there are specific triggers for Bitcoin’s recent slide.
The Fed’s anti-inflationary measures
Inflation has hit a 39-year high of 7%, meaning consumers face increased costs for things like food, gas and shelter. The Federal Reserve is taking steps to rein in inflation, including likely interest rate hikes starting in March. This is having a big impact on high-risk investments like Bitcoin as people start moving their money to safer asset classes.
The Omicron variant
The economic worries caused by the emergence of the omicron variant marked the start of Bitcoin’s recent woes. As COVID cases spiked late last year, economic fears grew and drove the price of Bitcoin down. Some are also claiming that the major crypto – which hit an all-time high on Nov. 10 – needed a correction.
Kazakhstan’s mining problems
Following China’s crypto ban, a number of Bitcoin miners moved their operations to Kazakhstan. By July, the country had become responsible for around 18% of Bitcoin mining globally, according to the Cambridge Center for Alternative Finance. However, Kazakhstan is currently facing numerous protests over fuel prices and other issues. This caused the government to shut down the internet nationwide, and bitcoin miners cannot operate without an internet connection.
What future for Bitcoin?
There are always financial experts ready to sound the death knell for cryptocurrencies, just as others proclaim that we are on the verge of reaching new heights. But these extreme views don’t tell the whole story. Some factors could help Bitcoin rise, while others could push it further down.
Of the above triggers, only Kazakhstan’s mining problems are really behind us – and even then, the country’s unrest continues. Omicron is there. This will likely have less of an economic impact than previous waves of COVID, but we don’t yet know how that will play out. And inflation and anti-inflationary measures will be with us for the foreseeable future. This makes Bitcoin unlikely to rise in the coming weeks. There is also the prospect of increased regulation, but that has been on the horizon for several months now.
That said, it is also true that previous lows preceded new highs. In 2021, Bitcoin lost nearly half of its value over the summer before surging to a new all-time high in November.
Unfortunately, it was a very different market. The outlook for many asset classes in 2022 is much flatter than last year. Low interest rates, stimulus checks and various economic easing measures meant there was plenty of money in 2021. And, despite concerns over the pandemic, people were willing to take a chance on a riskier asset class.
If you plan to buy the dip, keep in mind that the price of Bitcoin could drop further. Make sure you understand the risks involved and only invest money you can afford to lose. That way, if the worst happens and the bottom of the market drops, it will be frustrating, but you won’t be broke financially.
Bitcoin could take time to regain its highs
Cryptocurrency investments are different from the stock market. When you invest in a stock, you are buying a small part of a business. You can gauge the value of this business based on its earnings reports, balance sheets, and profit-generating potential. Cryptocurrencies don’t have the same backing – you’re not buying part of a business, you’re buying a token or coin. This is why sentiment is so important: Ultimately, Bitcoin is only worth what people are willing to pay for it. This is also one of the reasons why Bitcoin is volatile, as market confidence can rise and fall quickly.
Some argue that Bitcoin is a form of digital gold – a store of value that will retain its value over the long term. This argument is reinforced by the fact that only 21 million Bitcoins will ever be produced. Unlike traditional currencies like the US dollar, Bitcoin’s supply is fixed. This could – in theory – mean that its price will increase over time.
That’s not the only reason people buy Bitcoin. Some believe it is the future of money, or at least the future currency of the internet. Bitcoin has made huge strides in terms of adoption over the past year, which lends credence to this idea. Not only are more individuals holding Bitcoin, but it is also accepted by more traders, and it has attracted institutional support as well.
The world has woken up to Bitcoin over the past few years. It’s still a risky investment, but over time, with the right headwinds, there’s a good chance it could eventually regain and replace its 2021 highs.
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Emma Newbery owns Bitcoin.
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