The volatility of cryptocurrency leaves many wondering if it will crash.
The 2021 digital currency experienced a rollercoaster ride, reaching an all-time high at $69,000 on the 10th November 2021. It has fallen steadily since 2022, and currently has a value around $47,000.
Bitcoin has taken its 2021 investors on a rollercoaster trip. But where does it go next?
Why is crypto plummeting?
Bitcoin has been riding a rollercoaster ride recently, with prices rising and falling in response to a variety of news stories. However, it wasn’t the only cryptocurrency to experience a turbulent ending to 2021.
Global stocks have been affected by uncertainty over a new Covid version and higher interest rates. Businesses will find it more difficult to borrow money. This uncertainty and fears over future regulation have dragged down the cryptocurrency market.
The December start saw bitcoin’s price and many other notable digital assets drop sharply. Bitcoin fell once more in the early 2022: Bitcoin’s value dropped to approximately $40,000 per coin towards end of January.
China’s continuing crackdown on cryptocurrency and fears over US interest rates hikes are both factors. It has been speculated that Russia could ban crypto operations.
Why is bitcoin so volatile
Bitcoin does not have an underlying asset, unlike traditional investments like company shares.
The Bitcoin price today doesn’t depend upon how well a company is doing but on whether investors believe it will rise or fall. It is based solely on speculation about its future performance.
This can lead to sudden swings in bitcoin’s price, even within 24 hours. There have been many reasons why the price fluctuated.
Negative stories
The price of bitcoin has dropped due to negative stories and the threat of regulation. These include:
Russia may ban cryptocurrency operations
Elon Musk announced in May 2021 that Tesla would no long accept cryptocurrency payments due to environmental concerns
Chinese government sanctions in June 2021 against trading and mining Bitcoin
Donald Trump called bitcoin “a scam competing against” the dollar to be “the world’s currency” later in the month.
UK banks refuse to pay crypto exchanges
FBI agents confiscated millions of dollars worth bitcoin from criminals
UK’s financial watchdog bans Binance, one the biggest crypto exchanges. Santander and HSBC follow their lead.
IMF Warnings – The IMF issued warnings in August about countries using cryptocurrency as legal tender. They said widespread use would be a threat to “macroeconomic stability”, and could damage financial integrity
Crypto heist: Crypto hackers Poly Network stole $600m in August. However, they returned more than a quarter of the money four days later, claiming that they did it “for fun” to expose the system’s vulnerability before anyone else.
Positive stories
There have been many positive stories, however, that have helped push the price higher over the past 12 months.
Morgan Stanley was the first US bank that offered bitcoin funds to wealthier clients. But, it was restricted to 2.5%.
Elon Musk announced that Tesla will accept bitcoin payments once again if it uses more than 50% renewable energy.
Amazon has posted a job posting for a digital currency and blockchain product leader, prompting speculation that Amazon will soon accept Bitcoin as payment.
El Salvador made bitcoin legal tender
Some stories have mixed results in regards to cryptocurrency. For example, the Federal Reserve of the United States is contemplating whether or not it will launch its own digital currencies.
An executive order was issued by Joe Biden, the US president. It aims at coordinating the US government’s efforts to regulate digital assets. Many crypto-fans think regulation is bad. However, some believe that this executive order could be helpful in the development of digital assets so that the appropriate consumer protections can be put in place.
Is Bitcoin’s bubble about to burst?
Assets that rise rapidly in price and reach record highs are more likely to crash. Or, at most, a correction. When the price falls to a “normal” level.
This is the state that bitcoin appears to be in right now.
The cryptocurrency took 11 year from its launch to reach $20,000 per currency, but it only took three weeks for bitcoin to double in value.
2013 was a crucial year for crypto investors. Bitcoin’s price rose from $13.40 at its beginning to $1,156.10 in December. It then fell to $760 just three days later.
Fast forward to 2021. The price had risen more than 700% in twelve months.
It’s impossible to predict where it’ll go next.
Bitcoin will recover
When it comes to investing, there are no guarantees. It can also fall just as fast as it can rise again.
There are many concerns about cryptocurrency:
China is one of the worst countries in the world.
All around the world, there are calls for increased regulation
Environmental concerns
Its price is only based on speculation
Further regulation is seen to be a threat against the decentralisation crypto which is having an impact on the price.
Bitcoin’s positive attributes are highlighted by its supporters:
Revolutionizing technology that transforms industries
Transactions are simpler and less expensive by eliminating the “middleman”
Easier global trade
Transactions are more secure
Because it isn’t printed or seized, it makes a safe and valuable store of value
Bitcoin has been touted to be an alternative to gold. It could also prove itself as an inflation hedge.
Because bitcoin is volatile, it is possible for it to gain momentum once again in the future (e.g., weeks, months, or years).
It’s impossible to predict whether bitcoin will crash in future because no one knows the future.
What happens to bitcoin if the stock exchange crashes?
Not necessarily. Although bitcoin supporters view it as a diversifier, it was not as good as stocks when the coronavirus pandemic began. Because investors panic-sold all the stock, this is why.
In the first 2 weeks of March 2020 bitcoin fell more than 40%.
Rosie Bullard is a partner and portfolio manager at James Hambro & Partners.
“So it was not exactly a store value in an Equity Market reversal.”
“If we look back to March 2013, when the market collapsed, you won’t see bitcoin suddenly rising during that period.”
Rosie Bullard, portfolio manager at James Hambro & Partners and partner
However, it is important to note that how crypto assets perform when stock markets fall will depend on the reasons for financial market collapse.
It would be a shock to inflation, as we witnessed in 1974. Most bitcoin investors believe it would offer protection.