It is uncertainty over the future of bitcoin which has caused prices to crash. In June 2022, it plummeted below $18,000. It was still below $20,000 by November 2022, just a year after its record high of $69,000.
Cryptocurrency is volatile, with a track record of “boom and bust“ cycles that have left many wondering whether it’s safe to invest.
The price of bitcoin, the most popular cryptocurrency, dropped below $16,000 again in November, a year after it reached a record high of $69,000 in November 2021. It’s currently worth more than $17,000.
With the digital currency on a downward trajectory, what’s fuelling it?
In this article we explain:
Bitcoin has taken its investors on a rollercoaster ride in 2021, where is it heading next?
What is happening to the value of bitcoin and why?
Bitcoin is incredibly volatile. It is prone to rising and falling sharply on a daily basis. But it’s not the only cryptocurrency to have had a tumultuous time recently.
Global stocks have gone into a downturn as result of:
The war in Ukraine
Inflationary fears
Higher interest rates, which will make it more expensive for businesses to borrow money
This has spilled over into the cryptocurrency market.
The current slump in November 2022 has been triggered by the collapse of FTX, which handled around $1 billion transactions each day. Its collapse is having a knock-on effect on other crypto exchanges.
In June 2022 bitcoin dropped below $20,000 for the first time since 2020. This was prompted by the decision of Celsius Network, a major US cryptocurrency lending company, to freeze withdrawals and transfers, citing “extreme” conditions.
The move fuelled a slump across the cryptocurrency market.
China’s continued crackdown on crypto is playing a part too. And there has also been speculation that crypto operations could come to a halt in Russia.
In addition to this, there have been sudden and severe sell-offs of major cryptocurrencies. This has triggered panic and further sell-offs as consumer confidence is knocked.
Why is bitcoin so volatile?
Unlike traditional investments such as company shares, where price movements may well be influenced by the performance of the business, bitcoin has no underlying asset.
This means that the movements in its price are based purely on speculation among investors about whether it will rise or fall in future.
As a result, there can be violent swings in the price of bitcoin, even in the space of 24 hours.
At the moment, high inflation and a cost of living crisis are causing people to reduce their investment risk by selling their cryptocurrency.
There have also been a number of incidents that have caused the price to fluctuate:
Negative stories
A number of negative stories and threats of further regulation have pushed the price of bitcoin down.
These include:
In November 2022 cryptocurrency exchange FTX went bust after its rival Binance pulled out of a deal to buy it
In June 2022, Celsius Network, a major US cryptocurrency lending company, froze withdrawals and transfers, citing “extreme” conditions.
Also in June 2022, Binance, one of the world’s largest cryptocurrency exchanges, paused bitcoin withdrawals, with chief executive Changpeng Zhao blaming a “stuck transaction” that was causing a backlog.
Early in 2022, it was reported that Russia might ban cryptocurrency operations. But then, after the invasion of Ukraine, there were calls for crypto exchanges to ban Russian transactions.
In May 2021, Tesla boss Elon Musk said that the electric car maker would no longer be accepting digital payments over concerns about the impact of cryptocurrency “mining” – the computing power required to create the likes of bitcoin – on the environment.
In June 2021, banks and payment institutions in China were told to stop enabling crypto transactions, and the Chinese government banned the mining of the currencies. Then in September 2021, all crypto transactions were declared illegal, in effect meaning that the likes of bitcoin were banned.
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Also in June 2021, then US president Donald Trump described bitcoin as a “scam” competing against the dollar to be “the currency of the world”.
In August 2021, UK regulator the Financial Conduct Authority in effect blacklisted Binance, one of the largest crypto exchanges. Big banks such as HSBC and Santander followed suit by blocking customers from making payments to Binance.
In the same month, the International Monetary Fund issued a warning on countries using cryptocurrencies as legal tender, saying its widespread use would threaten “macroeconomic stability” and could harm financial integrity.
Crypto heist: last August, a hacker stole $600m in a cyber attack targeting the crypto platform Poly Network, only to return more than half of it four days later saying they did it “for fun” and to “expose the vulnerability” in the system before others did.
Positive stories
But there have been more positive stories, and these have given the bitcoin price some protection over the past year:
In March 2021, Morgan Stanley became the first big US bank to offer wealthier clients access to bitcoin funds – albeit restricted to no more than 2.5% of an investor’s total net worth.
In June 2021, a month after sparking a crypto sell-off, Elon Musk said Tesla would probably accept bitcoin payments again when more than 50% of its energy usage came from renewable sources.
Amazon posted a job advert for a “digital currency and blockchain product lead” in July 2021, prompting speculation that it would soon accept bitcoin as payment.
Last September, El Salvador made bitcoin legal tender.
Other stories have been more mixed in terms of what they mean for cryptocurrencies. Among them has been the US Federal Reserve considering whether to launch its own “central bank digital currency” (CBDC).
In March this year, President Joe Biden issued an executive order that aims to co-ordinate the US government’s actions on the regulation of digital assets.
While many crypto fans think regulation is a bad thing, some think this new executive order could help with the development of digital assets, such as the CBDC, to ensure the right consumer protections are in place.
Has bitcoin’s bubble burst?
In 2021 the price soared by more than 700% in 12 months to a record high of $69,000 in November
It certainly seems like bitcoin’s bubble has burst as investors have lost confidence in the crypto sector. It is uncertainty over the future of bitcoin which has caused prices to crash.
In June 2022, it plummeted below $18,000. It was still below $20,000 by November 2022, just a year after its record high of $69,000.
When assets rise very quickly in price and surge to a record high, typically this makes a crash much more likely – or at least a correction, which is when the price falls back down to a more “normal” level.
This appears to be the situation that bitcoin is in right now. It took the cryptocurrency:
11 years from launch to get to $20,000 per coin
But only three weeks for bitcoin’s price to double from there
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A decisive year for crypto investors was 2013. Bitcoin’s price went from $13.40 at the start of the year to its height in December of $1,156.10, before falling to about $760 three days later.
Where it is heading next is equally unpredictable.
Check out one Times Money Mentor reader’s crypto experience: “Bitcoin’s rollercoaster ride has swept me to an £8,500 profit in less than a year”
Will bitcoin go back up?
There are no guarantees when it comes to investing. As quickly as bitcoin falls, it could just as rapidly climb again.
There are a number of concerns about cryptocurrencies that are dampening its prospects:
Cryptocurrency exchanges going bust
Crackdowns in countries like China
Calls for greater regulation across the globe
Environmental concerns
Security issues and hacks
Their price is based solely on speculation
Further regulation is seen as a threat to the decentralisation of crypto, which is having an impact on the prices of digital currencies.
Bitcoin’s fans point to its positive qualities:
Transformative technology that could revolutionise industries
Simpler and cheaper transactions by cutting out “middle men” such as banks
Easier global trade because, with a non-fiat digital currency, there would be no concerns about exchange rates
Transactions are more confidential
It is a safe store of value because it can’t be printed or seized
Bitcoin has been touted as an alternative to gold, meaning it could prove itself as a hedge against inflation
Given its volatile nature, it is possible that bitcoin will gather momentum again at some point in the future (perhaps weeks, months or even years down the line).
But no one has a crystal ball and the speculative nature of bitcoin makes it difficult to predict.
Find out more about the tips (and mistakes to avoid) when investing with cryptocurrencies.
The market prices of cryptocurrencies are highly volatile
Will bitcoin go up if the stock market crashes?
Not necessarily. Supporters of bitcoin see it as a diversifier in balanced portfolios, but it did no better than stocks at the start of the coronavirus pandemic. This is because investors panic-sold everything.
In the first two weeks of March 2020, bitcoin went down by more than 40%.
“That was when we saw all equity markets take an aggressive leg down because of concerns about Covid-19,” notes Rosie Bullard, partner and portfolio manager at James Hambro & Partners. “So it wasn’t exactly a store of value in an equity market reversal.”
“If you look back to March of last year when we saw the market collapse, you didn’t see bitcoin suddenly rally in that period.” Rosie Bullard, partner and portfolio manager at James Hambro & Partners
That said, how crypto assets perform during stock market falls will depend on why financial markets have collapsed.
If it was all about an inflationary shock, such as happened in 1974, most bitcoin investors believe it would provide protection.
If you want to read more about the alternatives to bitcoin, check out our article here.
Wager Mage
Photo: Worldspectrum
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