Bitcoin crash: what’s behind crypto collapse?

Bitcoin crash: what’s behind crypto collapse?

Cryptocurrency is volatile, with a track record of “boom and bust“ cycles that have left many wondering whether it’s safe to invest.

After hitting a record high of $69,000 in November 2021, the price of bitcoin, the most well-known cryptocurrency, fell below $16,000 this month.

What's driving the digital currency, which appears to be on a downward trend?

What is happening to the value of bitcoin and why? 

Bitcoin is extremely erratic. It frequently rises and falls abruptly throughout the day. However, it's not the only cryptocurrency to have experienced recent instability.

Global stocks have gone into a downturn as a result of:

• The war in Ukraine
• Inflationary fears
• Higher interest rates will make borrowing money for businesses more expensive.

This has spread to the market for cryptocurrencies.

The failure of FTX, one of the biggest cryptocurrency exchanges in the world, caused a slump in November 2022. Each day, FTX processes about $1 billion worth of transactions.

Bitcoin declined below $20,000 in June 2022. This was brought on by Celsius Network's decision to suspend withdrawals and transfers, claiming "extreme" conditions. Celsius Network is a significant US bitcoin lending organization.

The action fueled a decline in the value of all cryptocurrencies, which for the first time since January 2021 saw a value below $1 trillion.

After bitcoin, ether is the second most popular token, and it dropped as much as 16% to $1,177, its lowest level since January 2021.

Another factor is China's ongoing crackdown on cryptocurrencies. Additionally, there have been rumours that crypto operations in Russia may cease.

Major cryptocurrencies have also experienced abrupt and severe sell-offs. As a result of the resulting panic and further sell-offs, consumer confidence has been damaged.

Why is bitcoin so volatile?

Bitcoin has no underlying asset, in contrast to conventional investments like stock, where price movements may very well be influenced by the performance of the business.

This indicates that changes in its price are solely driven by investor speculation about whether it will increase or decrease in value in the future.

As a result, the price of bitcoin can fluctuate drastically, even within a single day.

People are currently selling their cryptocurrency in order to lower their investment risk due to high inflation and a crisis in the cost of living.

Additionally, there have been several events that have caused the price to change, including:

Negative stories

The price of bitcoin has fallen as a result of several unfavourable reports and threats of additional regulation.

These include:

• Exchange of cryptocurrencies in November 2022 After competitor Binance backed out of a deal to acquire the company, FTX encountered problems.
• A significant US cryptocurrency lending company, Celsius Network, halted withdrawals and transfers in June 2022, citing "extreme" circumstances.
• Also 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. Chief executive Changpeng Zhao.
• It was suggested that Russia might forbid cryptocurrency operations at the beginning of 2022. However, there were calls for cryptocurrency exchanges to prohibit Russian transactions after the invasion of Ukraine.
• Elon Musk, the CEO of Tesla, announced in May 2021 that the electric vehicle manufacturer would stop accepting digital payments due to worries about the environmental effects of cryptocurrency "mining," or the use of computing power to create cryptocurrencies like bitcoin.
• Banks and payment companies in China were instructed to stop allowing cryptocurrency transactions in June 2021, and the Chinese government outlawed cryptocurrency mining. Then, in September 2021, all cryptocurrency transactions were deemed illegal, effectively outlawing currencies like bitcoin.
• Also in June 2021, Donald Trump, who was the US president at the time, called bitcoin a "scam" that was vying with the dollar to be "the money of the world."
• Over the years, FBI agents have taken bitcoin worth millions of dollars from criminals.
• One of the biggest cryptocurrency exchanges, Binance, was effectively blacklisted in August 2021 by UK regulator, the Financial Conduct Authority. The blocking of payments to Binance was imitated by large banks like HSBC and Santander.
• The International Monetary Fund warned nations using cryptocurrencies as legal tender in the same month, stating that such use would jeopardise "macroeconomic stability" and jeopardise financial integrity.
• Cryptocurrency heist: In a cyberattack last August that targeted the cryptocurrency platform Poly Network, a hacker stole $600 million. After returning more than half of it four days later, the hacker claimed that they had done it "for fun" and to "expose the vulnerability" in the system before others did.

Positive stories

However, there have been more encouraging reports, and these have helped to protect the price of bitcoin during the previous year:

• While limited to no more than 2.5% of an investor's entire net worth, Morgan Stanley was the first major US bank to provide wealthy clients access to bitcoin funds in March 2021.
• Elon Musk predicted Tesla would likely resume accepting bitcoin payments in June 2021 when more than 50% of its energy consumption came from renewable sources, a month after causing a crypto sell-off.
• In July 2021, Amazon advertised a position for a "digital currency and blockchain product lead," sparking rumours that it would soon start taking bitcoin as payment.
• El Salvador legalized bitcoin as currency in September.

In terms of what they signify for cryptocurrencies, other tales have had a more ambiguous impact. The US Federal Reserve has been one of them, debating whether to introduce its own "central bank digital money" (CBDC).

President Joe Biden issued an executive order in March of this year to coordinate the US government's efforts to regulate digital assets.

Although many supporters of cryptocurrencies believe that regulation is bad, some believe that this new executive order could aid in the development of digital assets like the CBDC and help to ensure that the proper consumer protections are in place.

Has bitcoin’s bubble burst?

Given that investors no longer have faith in the cryptocurrency industry, it appears that the bubble surrounding bitcoin has burst.

The loss of confidence has caused prices to crash:

1. The price increased by more than 700% in just one year in 2021, reaching a record high of $69,000 in November.
2. Let's fast-forward to June 2022, when it fell to less than $18,000.
3. By November 2022, just one year after its record highs, it was still below $20,000.

When the price of an asset rises quickly and reaches a record high, a crash or at the very least a correction—when the price drops back down to a more "normal" level—becomes much more likely.

It would seem that this is the state of bitcoin at the moment. The cryptocurrency was used for:

• In 11 years, the price of a coin will reach $20,000.
• But it took just three weeks for the price of bitcoin to double after that.

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 about $760 three days later.

Where it is heading next is equally unpredictable.

Will bitcoin go back up?

Regarding investing, there are no assurances. Bitcoin could rise again just as quickly as it falls.

Numerous worries about cryptocurrencies are dimming their prospects, including:

• Cryptocurrency exchanges going bust
• Crackdowns in countries like China
• Calls for greater regulation across the globe
• Environmental concerns
• Security issues and hacks
• Their price is based solely on speculation

The decentralisation of crypto is viewed as being threatened by additional regulation, which is having an effect on the prices of digital currencies.

Bitcoin’s fans point to its positive qualities:

• Technology that could revolutionise various industries
• simpler and less expensive transactions by removing "middle men" like banks
• Global trade would be simpler because there wouldn't be any worries about exchange rates with a non-fiat digital currency.
• 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, so it may prove to be an effective hedge against inflation.

Given its volatility, it's possible that bitcoin will at some point in the future regain its momentum.

But no one has a crystal ball, and predicting the future of bitcoin is challenging due to its speculative nature.

Will bitcoin go up if the stock market crashes?

No, not always. Bitcoin is viewed as a diversifier in balanced portfolios by its proponents, but at the beginning of the coronavirus pandemic, it performed no better than stocks. Investors panicked and sold everything, which is why.

The price of bitcoin fell by more than 40% in the first two weeks of March 2020.

Because of worries about Covid-19, all equity markets experienced an aggressive run down at that time, according to Rosie Bullard, partner, and portfolio manager at James Hambro & Partners. So, with a downturn in the equity market, it wasn't exactly a store of value.

“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.”

Nevertheless, the reason for the collapse of the financial markets will affect how crypto assets behave during stock market declines.

Most bitcoin investors think it would offer protection if it were all about an inflationary shock, like what occurred in 1974.

If you want to read more about How does bitcoin work? check out our article here.