Bitcoin is down 8.5% since the start of the year, according to data from CoinMarketCap and has lost nearly 40% of its value since its November high.
The market capitalization of the grandfather of the cryptocurrency world represents around 40% of the total cash invested in digital currencies and is by far the largest and most established currency.
What is behind the fall of bitcoin?
Here are four key reasons for the recent decline in electronic currency.
Uncertain economic conditions
There is a lot of uncertainty right now, which has caused the stock market and cryptocurrency industry to crash. In addition to the omicron variant, the Federal Reserve said it is time to tighten monetary policy.
This means that it could raise interest rates in March. With less cash circulating, investors are turning away from riskier asset classes like cryptocurrencies.
The changing narrative of bitcoin
One of the reasons people are interested in bitcoin is that they see it as a potential store of value, like gold. With a fiat currency like the US dollar, the government can print more money, as has been the case in recent years.
On the contrary, there will only be 21 million bitcoins. So if he dollar loses value and bitcoin does not, this should be a safer asset class. But critics argue that this narrative doesn’t hold up.
That is, if bitcoin were a good hedge against inflation, its price would be rising right now. The problem is that inflation rose 7% in 2021, faster than it has risen in 40 years, and the price of cryptocurrency is falling.
The other argument is that a good store of value should be a long-term safe, not a volatile and speculative asset. However, bitcoin bulls argue that it is too early to tell. It may be a safe haven asset in the future, but there are many other factors influencing its price right now.
Bitcoin mining problems
Facing widespread protests over rising energy costs and various political issues, the President of Kazakhstan declared a state of emergency and shut down much of the Internet. This nation is responsible for about a fifth of all mining in bitcoin, for which you need Internet access, but the network in the country was down for six days in January.
As you remember, several bitcoin miners moved their operations from China after it cracked down on crypto in 2021. Originally, they were attracted by Kazakhstan’s low energy prices, but now that the country is facing an energy crisis, it is reversing its pro-mining stance.
They may now need to move on again; the question is whether they will go to places with a lot of renewable energy, as Bitcoin’s huge energy consumption is a major environmental issue.
Cryptocurrency is volatile
The price of bitcoin has seen several significant price drops as well as big increases over the years. There are many reasons for this, from the lack of regulation to the speculative nature of this asset.
The key is not to panic during dips and keep your eyes on the long-term horizon. If you only invest money you can afford to lose, it’s much easier to weather the storms. As long as your initial reasons for buying Bitcoin are still valid, you can afford to wait for the price to drop.
Should you buy Bitcoin?
It is unlikely that bitcoin produce the kind of eye-popping returns we saw from various altcoins last year. But the fact that it has been around for so long makes it more likely that it will survive a big market crash, and it is a much safer long-term bet than many less established altcoins.
As for whether you should buy now, a lot depends on your personal situation, your understanding of cryptocurrencies, and your attitude towards risk. If you don’t have cash to spare or are worried about meeting other financial goals, now is not the time to buy crypto.
On the other hand, maybe your emergency fund is topped up, you have good retirement savings, and you were already considering buying bitcoin. In that case, now might be a good time.
It is certainly sensible to ensure that bitcoin represent a good portion of your total cryptocurrency investments.
if you decide to buy bitcoin, try to think long term and make sure that cryptocurrency only represents a small part of your overall investment portfolio. That way, if it falls further, or if the cryptocurrency market crashes completely, it will be disappointing, but not financially devastating.
With information from The ascent.
Source: Larepublica
Kingston is an accomplished author and journalist, known for his in-depth and engaging writing on sports. He currently works as a writer at 247 News Agency, where he has established himself as a respected voice in the sports industry.
