3 reasons Bitcoin is down 30%
Hedging against inflation was one core reason investors bought Bitcoin. Now with the Fed’s shift toward fighting it, are we witnessing a switch in momentum?
After hitting an all-time high of $68,000 in November, Bitcoin is down 30% — the same price level as October. But two months ago, that price was headed higher, and now it stands at the support level of $47,000.
Despite that, Bitcoin is still up 60% year to date and 140% higher than December 2020.
Bitcoin’s price volatility isn’t unusual
We’ve been here before. Bitcoin prices have swung this much and more in a month’s time as recently as this year.
Explanations for Bitcoin’s price swings depend on which expert you ask. The reasons usually cited include fear of government regulation, inflation, coronavirus resurgence or crypto heists and security concerns.
So, what’s happening now?
1. Inflation
One of the main things affecting Bitcoin’s price is inflation. Until recently, gold was the go-to asset for those seeking a hedge against inflation. Gold still holds its value when the dollar falls.
But thanks to technology and crypto exchanges, Bitcoin has, for many, taken the role of “digital gold” and an inflation hedge.
Federal Reserve policymakers decided on Wednesday to tackle inflation by reducing its bond purchases and slowly increasing interest rates in 2022 and beyond. These changes may have eased investor fears that the US dollar will lose its value.
And that provides downward pressure on crypto prices, including Bitcoin.
2. Profit taking
Corrections in bull markets are normal. When an asset has run up for a long period, some investors decide to pocket the profit — particularly if the price slips.
As the price pulls back, others may close their positions in panic or get stopped out — with the price reaching a preset sell point — especially if they were overleveraged. This can push the price even lower.
In a bull market, pullbacks are often considered as buying opportunities and can drive prices back up. But there’s no guarantee of this, and prices can move sideways or lower until more buyers get in to push the price higher.
Such a change appears unlikely for the moment. Bitcoin balances on exchanges continue to decline and are at their lowest point this year. Bitcoin owners are holding the asset within their wallets and off the exchanges, making them harder to trade. This suggests Bitcoin investors are holding pat.
3. Government crackdown
India recently announced a bill to ban private cryptocurrencies. This bill follows the footsteps of China, where the central bank declared all cryptocurrency transactions illegal. Closing down Bitcoin transactions in these two most-populous countries in the world could certainly affect the price of the asset globally.
So what’s ahead?
This downturn does fly in the face of some of the expert opinion around Bitcoin. A report this month from analysts at Bloomberg predicted Bitcoin would reach $100,000 in 2022. “The reasons Bitcoin corrected about 50% in 2021 were fundamentally bullish, as we see it, and could solidify rising prices in 2022,” the report says.
As with a down-but-not-out stock, that suggests a buying opportunity if you agree with the experts.
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