Why did Bitcoin collapse almost twice in six months, from $64,000 to $29,000, and is it worth investing in cryptocurrencies now?
In 2021, the Bitcoin rate showed an amazing growth. Anyone who bought a virtual coin at the beginning of the year and sold it at the end doubled their fortune.
However, every rise is inevitably followed by a painful fall. In recent months, the most famous cryptocurrency in the world has fallen by more than 50%.
In November 2021, the value of Bitcoin increased to more than 64,000 dollars for one virtual coin, and now it is trading at 29,000-30,000. The cryptocurrency was noticeably in demand at the beginning of May.
Why is the Bitcoin rate falling and what to expect from the main cryptocurrency in the near future?
Why did the Bitcoin rate fall?
The fall of the main virtual currency of the world began after the change in the value of the real monetary unit – the US dollar.
The fact is that on May 4, the US Federal Reserve System, as part of the fight against record inflation, announced an increase in the discount rate by 0.5% basis point to 0.75-1%.
The Fed hasn’t done anything like this in over two decades. The last increase in the discount rate over 0.25% b. It was May 16, 2000.
Why is this so important? By raising interest rates, the Fed, which acts as the central bank of the United States, actually raises the cost of money for banks, and therefore for businesses, citizens, and investors.
For the latter, this is a signal to sell risky assets and invest in more reliable instruments, for example, the US dollar. Yes, actually, it happened.
The stock markets felt the first blow. Over the next few days, the Japanese Nikkei 225 index fell by 4.65%, the British FTSE 100 – by 3.82%, the American industrial Dow Jones – by 6.53%, the technological Nasdaq lost more than 12%.
Uber added fuel to the fire. During the day, the capitalization of the world-famous service fell by 11%.
This comes after the UK’s BBC reported that due to “investor caution” (following the Fed’s rate hike), Uber CEO Dara Khosrowshahi warned the company’s employees to cut costs.
The world’s leading business publications explained that Bitcoin is not tied to traditional investment markets and is not a reliable tool for hedging against inflation.
However, the massive sell-off of the virtual currency, which took place against the background of a major decline in the traditional stock market, refuted all arguments.
“It was a narrative, but it’s not true,” Damanik Dantes, an analyst at CoinDesk’s cryptocurrency publication, states.
According to his observations, the trajectory of the Bitcoin rate is more similar to the trajectory of the share prices of technology companies, which operate at a loss despite high growth rates.
In other words, buying a virtual coin right now is no different than investing in the stocks of technology companies that have great potential but whose short-term prospects are unclear.
The growth of capitalization of companies is usually fueled by the excess budget of risk investors, which usually depends on the interest rate, that is, on the value of money.
With the Fed rate hikes and investors’ appetite for risk waning, Bitcoin’s selloff isn’t surprising.
“Investors and traders are looking for stability, high-quality valuable assets. This is the complete opposite of an asset like Bitcoin,”
Dantes explains
What experts say
One of the authors of the best-selling book “Rich Dad, Poor Dad” and entrepreneur Robert Kiyosaki called the collapse of Bitcoin “great news”.
He predicted that the price of the virtual coin would drop to $17,000.
“As I said before, I expect bitcoin to fall to $20,000. Then we’ll wait for the bottom to be tested, which could be at $17,000. As soon as that happens, I’ll go in big. Crises are the best time to get rich,”
Robert Kiyosaki
If Bitcoin does not hold on to the $30,000 mark and above, then its rate will fall even more than Kiyosaki expects, say technical analysts.
Barry Bannister, the chief capital strategist of the American investment company Stifel, believes that the value of the most famous cryptocurrency can drop to $15,000 per coin.
“Bitcoin is sensitive to GDP. Bitcoin falls when the Manufacturing PMI falls, which we expect in the third quarter of 2022. This indicates that Bitcoin’s last capitulatory decline may be yet to come,”
Barry Bannister
Rating agency Fitch warns that cryptocurrencies and digital finance could face “significant negative consequences if investors lose confidence in stablecoins, as many financial regulators have increased their influence on the sector in recent months.”
“While the market still needs to fully digest all the panic surrounding TerraUSD (a stablecoin whose capitalization collapsed from $18.7 billion to $2 billion on May 8), which may be accompanied by a capitulation (the bankruptcy of the TerraUSD project), Bitcoin is nearing the bottom from from the point of view of terms,” Yuya Hasegawa, a cryptocurrency market analyst from the Japanese bitcoin exchange Bitbank, believes.
What to expect
The fall of Bitcoin and TerraUSD is alarming to US Treasury Secretary Janet Yellen and US Securities and Exchange Commission Chairman Gary Gensler. This could lead to more regulation of cryptocurrencies.
Virtual currency crashes, which happen frequently, can cast doubt on the future of cryptoassets more broadly.
These doubts are reinforced by the fact that cryptocurrencies are taking on the characteristics of a classic stock ecosystem, and more and more professional investors are starting to trade them.
In April, American financial company Fidelity Investments, the largest US provider of pension asset management services, announced that it would allow employers to offer Bitcoin as a tool to multiply the investments of future retirees.
This is despite the fact that the US Department of Labor warns employers against such a step.
For example, Patrick Chosik, a senior portfolio strategist at the American research company Ned Davis Research, says that he is “long-term bullish on bitcoin.”
“We’re still seeing Bitcoin adoption expand,” says the expert. He points to millennials who want to invest in cryptocurrencies because they seem like a “legitimate option.”
However, not everyone agrees with this point of view, so the future of cryptocurrencies remains uncertain.