Bitcoin (BTC) is by far the most popular cryptocurrency today. Bitcoin market capitalization represents around 40% of all the cash invested in the crypto markets. It’s like a granddaddy of the crypto world. Nevertheless, bitcoin has had a few tough months. It’s down about 9% since the start of 2022 and has over the past two months lost about 40% of all its value.
Here are 4 key reasons for Bitcoin’s value dropping.
Uncertain Economic Conditions
As we speak, there’s a lot of uncertainty everywhere. This has caused the cryptocurrency industry as well as the stock market to fall. On top of the newest covid 19 variant (the omicron variant), the Fed has stated that this is the best time to tighten the monetary policy, which means it could reinstate the interest rates by March. With very little cash in circulation, investors seem to be pulling away from risky asset classes such as cryptocurrency.
Bitcoin Narrative Is Changing
One of the main reasons why many people were interested in bitcoin is because they consider it a store of value such as gold. With fiat currency such as the US Dollar, the government can now print more money as it has done over the years. However, if more cash is sloshing around, every dollar has less value, $100 won’t go as far towards sorting your bills as it did 5 years ago.
On the other hand, there would only be about 21 million bitcoin. Therefore, if the USD losses value and bitcoin doesn’t, BTC should be a much safer asset class. However, some critics might argue this narrative can hold. In case bitcoin was a great hedge against inflation; the price might start to increase today. The issue is that inflation climbed 7% back in 2021; way faster than it rose in 40 years and the price of bitcoin is now falling.
We could argue that the best store of value should be safer in the long term, not a speculative or volatile asset. Nevertheless, BTC bulls say it’s very early to tell. The bitcoin might well be a safer haven asset in the coming years, but many factors influence the price of bitcoin right now.
Issues For Bitcoin Mining
Faced with many protests about different political issues and rising energy costs, the president of Kazakhstan declared a national state of emergency and even shut down the Internet. Basically, Kazakhstan’s role in bitcoin mining is quite significant and you need Internet access for it, but Kazakhstan’s residents couldn’t access the Internet for 6 days in January.
A large number of bitcoin miners in china moved their operations after the state cracked down on cryptocurrency in 2021. The miners were initially attracted by Kazakhstan’s cheap energy prices, but with the country now facing an energy crisis, it’s reversing the previous BTC mining-friendly stance. If things continue this way, the miners might have to move again.
Crypto Is Volatile
Volatility is something every cryptocurrency investor must be prepared for. The price of bitcoin has seen a few significant drops in price and huge increases over the past few years. There are many reasons, from lack of sufficient regulation to the asset’s speculative nature.
The most important thing is not to panic sell bitcoin during the drops and instead keep a close eye on the long-term trading. Investing the money you can afford to lose, then you won’t lose yourself during the storms.
The Future Of Bitcoin
Currently, the economic climate is pretty different than it was a few years ago, and it’s not quite clear what could happen to bitcoin in a more risk-averse environment this year. Furthermore, with the possibility of increased regulation, it’s not yet clear what impact that might have in the short term. However, long-term regulation of the crypto market can build investor confidence and ultimately lead to wider adoption.
Fortunately, bitcoin adoption is still growing. Several countries are now considering accepting bitcoin as a legal tender. This is happening as more investors have embraced cryptocurrency and bitcoin, which means more capital will come into the market. And for retail investors, buying crypto has become very easy. Many applications are easy to access, and crypto exchanges have become more users friendly.