BTC dominates the crypto market. The negative trend in the bitcoin market has affected even the most well-known assets. Beginning in early May 2022, when the Bitcoin price was just around US$ 40,000, the price of bitcoin began a steep decline that has yet to bottom out.
Six months before this Bitcoin price drop, in November 2021, the commodity hit its All-Time High (ATH) and was worth US$ 68,000. So, what went wrong here? It’s common knowledge that the value of cryptocurrencies fluctuates wildly. Though what are the reasons behind the bitcoin price drop? Let’s talk about it here.
What Exactly is Cryptocurrency?
Digital assets traded freely between users without a governing body or bank oversight are known as cryptocurrencies (or “cryptos”). Instead, cryptographic techniques produce cryptocurrencies that may be bought, sold, and traded safely online.
Blockchain, the technology behind Bitcoin and most other cryptocurrencies creates a secure record of all transactions and verifies ownership claims in an immutable manner. The development of blockchains solved a problem with earlier attempts to build solely digital currencies, preventing duplication of assets and double-spending.
Depending on their function, cryptocurrency units may be called coins or tokens. There are a variety of digital currencies. You can use some of these as a medium of exchange for goods and services, others as a means of storing value, and others you can utilize within niche games and financial services.
The Top Reasons for the Bitcoin Price Drop
The steep decline in Bitcoin price impacted the value of all cryptocurrencies in May 2022. The recent decline in Bitcoin’s value has quickly become a major talking point in the financial markets.
Exactly why, therefore, is Bitcoin’s value decreasing? Please explain the root causes. Several factors may have contributed to this disaster, but all of them can be summed up in a single word: doubt.
Many people are selling Bitcoin in bulk since they don’t know how long the price drop will last. The following are other major factors contributing to the decline in bitcoin prices.
Reason#1: Price and Demand of Bitcoin
More and more media outlets, so-called “investment experts,” and business owners are extolling the virtues of Bitcoin, driving up demand from retail and institutional investors.
Countries with significant inflation and devalued currencies, like Venezuela, have also seen a rise in Bitcoin’s popularity. It is also often used to transfer significant sums of money to finance criminal enterprises.
The price of bitcoin has increased due to a decrease in the expected future supply and a rise in demand. Its value, however, continues to experience boom and bust cycles.
For instance, the price of Bitcoin experienced a significant surge in 2017, followed by a prolonged trough in 2018, and then two significant increases and downticks through 2021.
Reason#2: Sentiment
The price of cryptocurrencies is highly sensitive to media attention. Doubts about the Federal Reserve’s ability to control inflation without bringing on a downturn have been growing. Some others are concerned that there will never be a “soft landing” because of the recent inflation.
Public figures’ opinions influence the volatility of the bitcoin market. A notable person’s negative social media post or tweet could harm the value of a cryptocurrency.
For instance, the value of Bitcoin dropped two days after Elon Musk tweeted on 13 May 2022 that Tesla would no longer accept Bitcoin owing to environmental concerns.
It could lead investors to shift their portfolios away from volatile equities and cryptocurrencies and into more stable bonds and precious metals.
Reason#3: Regulations
Bitcoin came into markets after a financial crisis brought on by lax regulation of the derivatives industry. Cryptocurrency has gained a reputation for its open, borderless, and regulation-free ecology, although it is still largely uncontrolled.
There are advantages and disadvantages to Bitcoin’s lack of regulatory status. Because any central authority does not govern it, it can be freely traded across borders and is not subject to the same controls as conventional currencies.
Governments and other stakeholders still remain persistent in their efforts to legislate cryptocurrencies. Regulators will eventually be in place, but how they will affect Bitcoin’s value remains to be seen.
The price of Bitcoin, for instance, may be affected by decisions about cryptocurrencies made by the Securities and Exchange Commission (SEC) in the United States.
The Securities and Exchange Commission approved the first bitcoin-linked exchange-traded fund (ETF) in the United States, the ProShares Bitcoin Strategy ETF, in October 2021, and the price of Bitcoin promptly skyrocketed to $69,000. Nonetheless, Bitcoin’s price was still hanging around $40,000 just a few months after hitting that peak.
China’s September 2021 restriction on bitcoin trading and transactions impacted the global cryptocurrency market by reducing the available supply and increasing the required trade volume.
The Chinese government ordered mining farms to relocate outside the country to countries more receptive to the bitcoin industry. Starting at roughly $51,000 in September, prices dropped to around $41,000 by the month’s end, only to swiftly reclaim and even surpass earlier pricing levels as business picked back up.
Reason#4: Liquidation
According to U.Today, investors are liquidating future contracts due to the falling value of Bitcoin, particularly those that stipulate purchases in the long term.
It causes them to abandon or sell these contracts, reducing demand for the asset. As a consequence, the value of bitcoin continues to fall.
Reason#5: Cost of Production
Bitcoin’s price is largely set by its manufacturing costs, just like the prices of other commodities. Some studies have found that the price of bitcoin in crypto marketplaces is proportional to its marginal cost of production.
In Bitcoin’s case, the production cost is roughly equal to the total of the direct fixed costs associated with the hardware and energy used in Bitcoin mining, plus an indirect cost associated with the complexity of the Bitcoin mining algorithm.
In Bitcoin mining, a group of computers competes to be the first to decipher an encrypted number, with the winner receiving a block reward plus transaction fees accrued.
To unlock a block and receive a reward, one must use brute processing power to solve the hash. The cost of mining equipment will quickly add up for the miner. Bitcoin mining uses a lot of power, so it might be expensive to keep up. There are estimates that the Bitcoin mining network uses as much energy as many small countries.
Conclusion
Any investor faces challenges, but doing so in the volatile cryptocurrency market, where opinions can swing wildly, is especially challenging.
Keep in mind that this isn’t Bitcoin’s first price drop. If you look at Bitcoin’s price chart, you’ll notice that assets tend to recover in these types of markets. With this information, you can forego a sell-off due to fear.
Here we conclude our article “Bitcoin Price Drop: Reasons for the Decrease in Price.” You can visit our Cryptocurrency category page for more informative articles on cryptocurrency. Stay tuned for more informative articles.
