Bitcoin, one of the most important and popular cryptocurrencies is losing its value in recent times. You might have thought that with faltering stocks, high inflation, and doubts regarding how the Federal reserves will raise the interest rates, this would have been the best time to bet on Bitcoins. But, the most famous cryptocurrency, the one that changed the cryptocurrency market, has dropped about 20% this year. On January 24, 2022, the price of Bitcoin had gone down to $33,000.
It was just around three months ago that bitcoin had hit its highest on 8 November 2021 and reached $69,000. So why is the price of Bitcoin falling suddenly? Is Bitcoin becoming a risk asset now? Well, risk assets are the ones that have a certain amount of volatility in the market. For so long, high-yield bonds, commodities, stocks, etc, have been considered as high-risk assets, but in the current situation, even Bitcoin has become a risk asset.
“The reason that this particular 50% fall is occurring right now is that the market narratives have shifted from risk-on to risk-off. Liquidity is drying up as the Fed and other central banks start to taper excess stimulus, and also as regular folks start to realize that Covid-19 is winding down, that we are going to go back to work and that we’re not all buying NFTs and moving into the metaverse tomorrow” – Dr. Richard Smith
It is also not the first time that the prices of Bitcoin have fallen in the market so drastically. In the year 2017-18, the prices of Bitcoin had fallen by more than 80%. But during that time, major business corporations like PayPal and Fidelity had not invested their money into the crypto market. So the real question right now is, how are Bitcoin prices going to affect you?
How Bitcoin Price is Decided?
The vulnerable Bitcoin prices and its volatility has left many of its investors tensed. If you are one of them, you must be wondering and trying to calculate how and what is affecting the Bitcoin prices and who really sets these prices? Well, cryptocurrencies are decentralized in nature and thus it does not get affected by the monetary policies of the government. Bitcoin being one of the most popular cryptocurrencies is also decentralized and thus, its valuation does not depend on government policies.
So what really affects the Bitcoin prices? Just like the value of the U.S. dollar is determined by the demand and supply chain, similarly, the value of Bitcoin is also set according to the demand. In simpler words, that means that the price of Bitcoin totally depends on the demand of Bitcoin. So, when the demand for Bitcoin falls, so does the value of Bitcoin.
But this is not how its supply chain works. Other assets in the market like gold and fiat currency can increase their supply when the demand rises, but Bitcoin supply is absolutely inelastic. Even if the demand for Bitcoin rises, there is no rise in its production to meet the market demand. Thus, that plays a great role in determining the price of Bitcoin.
Unlike the fiat currency that can be produced again and again, Bitcoin does not have an infinite supply. There will only be twenty-one million Bitcoin circulation in the market and that number can never be increased. The new Bitcoins that are created have a fixed rate but that decreases over time. This is the reason why the supply of Bitcoin does not depend on the demand of Bitcoin.
Bitcoin investors and experts believe that this will cause inflation in the Bitcoin market later on. Unlike the fiat currency which is controlled by government policies and has a low inflation rate, the supply of Bitcoin is finite and also has a relatively small capital. That is what makes Bitcoin so sensitive and volatile. Its prices keep changing with the change in its demand.
For example, the government has the power to print as much fiat currency as they want and increase its supply in the market with its increasing demand. That has also led to hyperinflation and pushed the market value of some fiat currencies down to zero. But the finite supply of Bitcoin also makes it a secure and long-term asset. Some experts even believe that Bitcoin is not just as good an asset like gold, but also, in some cases, even better than gold.
Why Bitcoin Price is Going Down?
Something that has been worrying all the Bitcoin investors is the fall of the prices of Bitcoin. Up until November 2021, the prices of Bitcoin were quite smooth, but in recent days, the fall in prices of Bitcoin has created a buzz in the whole cryptocurrency market. So the question that has been bothering everyone is, why are the prices of Bitcoin going down? What are the factors that are pushing the prices of Bitcoin so low?
Well, one of the biggest reasons is the new policies that the US Federal Reserve has taken up. Jerome Powell has declared in December 2021 that the Federal Open Market Committee (FOMC) will double the monthly rate at which it reduces asset purchase. This measure or change in policy was brought about by the Federal Reserve to bring in control over inflation but this has also created a negative impact on the value of Bitcoin. Since then, the value of Bitcoin has been falling.
Another thing that is going to happen in the coming days is that Bitcoin will surely be adopted more widely and will be viewed as a more reliable option, but along with it, the value of Bitcoin will also go down. Tech stocks and cryptocurrencies like Bitcoin are losing their value because of the rise in interest rates by Fed. This policy is also greatly reducing the growth of many such risk assets.
Steve Sosnick, the chief strategist of Interactive Broker said, “We have no historical precedent for how Bitcoin and other cryptocurrencies might act if we enter a sustained period when central banks actively drain liquidity. Those tend to be difficult times for investors, and riskier assets tend to underperform safer ones”.
Other than the policies adopted by Fed, tensions with Russia in the Ukrainian borders are also having a bad impact on the prices of Bitcoin. Reffet said, “ Geopolitical concerns are driving market volatility in many tradable asset classes, and Bitcoin has proven to be somewhat correlated to broad market movements and less of a direct hedge against equity markets”.
But as mentioned earlier, this is not the first time that the prices of Bitcoin have fallen so greatly. It’s not something new for Bitcoin. Since 2009 when Bitcoin first started, this is the eighth time that Bitcoin prices have fallen so drastically. Just in July 2021, the prices of Bitcoin fell below $30,000 when the mining of digital currencies was cracked down by China. But Bitcoin prices have also gone up very high after that. So this kind of fall in the prices is very common.
Dr. Smith said, “Anyone that isn’t ok with the decline of at least 50% should not be in Bitcoin.” According to him, such falls in the prices of Bitcoin are perfectly normal and one need not stress about it.
Can Bitcoin Price Go to Zero?
The majority of the people have now invested their money in Bitcoin. 2021 had been a great year for Bitcoin, even though its prices had fallen greatly in July, it again gained its value in November. But the recent drop in Bitcoin prices and Russia declaring full-blown war at Ukraine is making Bitcoin investors wonder what if the prices of Bitcoin drop down to zero?
A study conducted by two economists from Yale University in 2018 published a report “Risks and Returns of Cryptocurrencies” in which they examined whether the price of Bitcoin could ever go down to zero in just one day. The authors think that the chances of Bitcoin prices crashing down to zero range from between 0% to 1.3%. they also suggested that even the currency euro has a 0.009% chance of dropping down to zero. Other than this, experts of the cryptocurrency market think that Bitcoin prices could easily go down to zero because of its intrinsic value.
But there are also supporters of Bitcoin who say that the value of Bitcoin could never go down to zero because it is backed by both mathematics and the confidence of its investors.
What Should Bitcoin Investors Do?
So if you are a Bitcoin investor, what should you do now? What steps must you take right now if you have invested your hard-earned money in such cryptocurrencies? Well, firstly, stop panicking. It is true that the prices of Bitcoin have fallen greatly and it is something to be stressed about, but there have been similar price movements in the case of Bitcoin earlier as well.
Just like the traditional assets like gold, even the prices of Bitcoin and other such digital assets will start to have a correlation due to the change in government policies. So if you are a Bitcoin investor worried about the cryptocurrency market and its price movements, you will be able to benefit from keeping a check on both the broader financial market and also the Bitcoin prices.
Ric Edelman, the founder of Digital Assets Council of Financial Professionals said, “This is the fifth time Bitcoin’s prices have fallen by 50% or more since its inception in 2009”. But you can expect more such regulations in the coming days for digital assets like Bitcoin.
Well, over the years, the growth rate of Bitcoin has been quite impressive. It is true that the prices of Bitcoin have gone down drastically right now, but a few years ago, its price was only $8,400. Also, it is not possible for the prices of Bitcoin to keep increasing at this rate forever. So, a few months back if you would ask me whether you should invest in Bitcoin, I would say that the chances are that you will be able to sell it for a much higher price later on. But right now, the market is not that stable thus, you must be careful before taking such a decision.
True that there has been a bit of uncertainty in the cryptocurrency market from the beginning of this year, and that has led the traders to sell their Bitcoins, but it is also true that, Bitcoin is a strong digital asset and its rate has been historically increasing, so if you are a Bitcoin investor, you must not lose your hopes because the end of 2022 might bring in positive changes in the cryptocurrency market for you.