Bitcoin Drops
Over the past few months, the price of Bitcoin plunged from its November highs of approximately $70,000 to now slightly above $36,000.
On Monday, Bitcoin, the world’s largest cryptocurrency by market value, crashed by 5.52% in just 24 hours.
Since the start of 2022, Bitcoin has fallen around 25% while Ethereum, the second-largest cryptocurrency by market capitalization, dropped by over 10% in only 24 hours and approximately 35% since the new year to $2,240 at the time of writing.
With Bitcoin being the main cryptocurrency and an already accepted ‘backbone’ of the crypto market, it’s not strange that the price of altcoins followed it south as well.
How Far Will Bitcoin Fall?
The fact is, the whole crypto market seems to be crashing and the only question seems to be – how deep will it go?
Bitcoin advocates argue its overall worth stands in its limited supply - only 21 million of the tokens can be minted - suggesting it should serve as a store of value during times of high inflation.
Still, US inflation is rising at its fastest pace in 40 years, seeming to disprove this.
To fight inflation, the Federal Reserve is, as already mentioned, preparing to raise interest rates, leading many investors to pull back.
That means the declines in cryptocurrencies have continued and there is yet no bounce back in values.
The Nasdaq Composite lost 7.6% last week, and the S&P 500 fell by 5.7% for its third straight weekly decline.
Almost every sector of the stock market sold off, with technology companies like Apple and Netflix taking massive blows.
The plunge gave a wake-up call to investors after the markets closed out 2021 in an exuberant manner, despite so many other parts of the economy getting hurt by the still ongoing pandemic, rising inflation and overall instability within the job market.
The usual investment case for Bitcoin is that it acts as a hedge against inflation as a result of government stimulus. However, it seems that there is a certain risk that Fed’s limiting inflation might work against Bitcoin.
What happened is that Bitcoin and other cryptocurrencies got swept up in a frenzy of investor positivity as the Fed deployed its vast emergency intervention to prop up a pandemic-ravaged economy in 2020.
Now, with a sell-off this big, it is rational to expect the price of Bitcoin will go below $30k, meaning that all assets will lose their two-year growth range.
It also seems that heightened regulatory scrutiny and increased price volatility are dampening Bitcoin’s prospects.
The Chinese ban of all crypto-related activities, as well as Russia’s central bank proposal of a ban over the use and mining of cryptocurrencies on its territory, are not helping Bitcoin’s value.
Is There a Way Back for Bitcoin?
However, the picture shouldn’t be viewed as entirely pessimistic. The fact is that the seasoned investors were expecting this correction, but the average investor wasn't.
Most people who got into crypto only last year are at a loss just because they had unrealistic expectations of crypto. They were led by the ads put out by the crypto-exchanges and now, they must carefully evaluate the current dip in prices so the volatility doesn’t scare them off.
Every market goes through a correction phase, and the crypto market is undergoing a correction phase after touching the $3 trillion mark in November last year.
However, we should be aware that Bitcoin peaked twice above $60k in 2021 and has retreated to the average price of January 2021 when Bitcoin was hovering around $36,000. The price of Bitcoin is still way above the highs of 2020, when the bull run started, so its current dip in price seems more of an opportunity rather than a crisis.
It is still possible that Bitcoin proves itself as a kind of next-generation gold, but it will take time for investors to become confident in its safety again.