On 12 May 2022, Bitcoin witnessed a dramatic plunge in which it hit its 24-hour-low of $25,402. After this crash, Bitcoin matched its December 2020 levels, after which it rebounded to just above the $29,000 mark. Even after the rebound, Bitcoin decreased by over 5% in just 24 hours. This was a massive setback after 2021, in which its prices increased by almost 70%. The prices of Bitcoin are down by 39% after its all-time high of $69,000 in November.
Similarly, Ethereum has dropped by 13% in just 24 hours, trading below the $2000 mark. Bitcoin prices have been going up and down (showing more volatility) ever since the Russian invasion of Ukraine began. The rise of inflation, increase in market volatility and uncertainty, and the recent geopolitical tensions have dramatically impacted the price of Bitcoin, even more so than expected. Amidst these geopolitical changes, Bitcoin was thought to be a hedge against inflation. However, it has not fulfilled its promises yet. However, experts still say that Bitcoin may cross $100,000 this year at some point, even after the recent drops.
Other cryptocurrencies have suffered similar losses. The most noteworthy was the stablecoin. In principle, stablecoins are pegged against the value of the US dollar. They are supposed to be a 'safe' crypto asset and protect their investors from the high volatility of cryptocurrencies. The main goal of stablecoins is to maintain their value as their peg, i.e., one US dollar. However, stablecoins have witnessed the most drastic plunges in the last couple of days. Two of the most popular stablecoins are Tether (USDT), USD Coin (USD) and TerraUSD (UST). Terra’s native token LUNA, which was trading at $119.18 in April, is now trading at $0.01, having lost 99% of its value in just 24 hours. On the other hand, UST is currently trading below $0.45.
Why Is This Happening?
There are several reasons for such sudden price drops. The largest cryptocurrency is now less than 50% of what it was in fall 2021. Some experts predict a 'crypto winter' marked by a further contraction in crypto prices. The current decline is due to the combination of several short-term and long-term inputs, factors and the situation of financial markets. Let’s discuss some of these:
Bitcoin and the Financial Market: The recent geopolitical events and their impact on crypto prices have demonstrated that cryptocurrencies are not independent in nature, i.e., they are not resistant to crisis and inflation. Since cryptocurrencies are decentralized assets, they should be free of governmental or market control. Many proponents have argued that this property will keep Bitcoin valuable during inflation and economic tensions. However, this argument has fallen flat since the price of Bitcoin has been highly dependent on world events. For instance, the Bitcoin price fell by 57% in March 2020 when the pandemic crushed the markets. Due to the recent tensions and accompanying inflation, investors are looking for a reliable port where they can protect their investments. Uncertainty is rising as the Federal Reserve and central banks increase their interest rates to counter inflation. On the other hand, the oil supply chain issues and a new COVID-19 outbreak in China have caused greater financial anxieties.
UST: Some experts blame stablecoins for the recent price crash. TerraUSD (UST) played a massive role in the crypto dip. Luna Foundation Guard (LFG), a non-profit organization that supports the Terra Blockchain, tried to protect the UST dollar peg by buying more and more Bitcoin reserves. It plans to defend the UST value by reserving $10 billion worth of Bitcoin. In an aggressive attempt, LSG bought $1.3 billion worth of Bitcoin last week, making its Bitcoin reserves worth $3.5 billion. The organization plans to lend Bitcoin to various exchanges and trading firms to protect the stability of UST. This intervention is adding more selling pressure for Bitcoin.
Recent Changes in Regulations: Since the value of cryptocurrency is not tied to any physical or tangible asset, it derives value mostly from what people believe its value to be. Therefore, when a government cracks down on cryptocurrencies, people’s belief in their value declines, which affects the prices of cryptocurrencies. For instance, when the Chinese government banned all crypto mining activities in June, the value of Bitcoin fell from $65,000 in April to around $35,000 in June. Similarly, when Tesla’s CEO, Elon Musk announced that Tesla would no longer receive payments in Bitcoin due to environmental concerns, the value of Bitcoin dropped dramatically.
In recent times, many big countries, including Germany, the US and India, are thinking about tighter crypto regulations. On the other hand, crypto investors have been shaken due to the increasing number of crypto fraud and hacks where people have lost significant amounts of money. This has affected the confidence of people in cryptocurrency. Additionally, mainstream crypto adoption has been slow, so it has become even harder to motivate people to invest in cryptocurrencies.
Inherent Volatility of Bitcoin: It is no secret that Bitcoin is inherently a volatile investment vehicle. Part of the interest in cryptocurrency is driven by its very volatility. People have been amazed by the rate they can make and lose money through cryptocurrencies. Since 2009, Bitcoin has plunged and surged several times in which investors either lost interest or flooded the market. Some exchanges offer risky propositions allowing people to trade with borrowed cryptocurrency.
Experts recommend that investors not allocate more than 5% of their portfolio to crypto investments. Cryptocurrencies are still a highly volatile and risky asset class, so you should never invest more than what you can afford to lose. You should invest only if you have enough savings for emergencies. If you are thinking of investing in Bitcoin now, you are speculating that the value of Bitcoin will rise again, and you will be able to sell at a higher price. However, keep in mind that the crypto market is volatile right now, so do not accept big returns instantly.
Ian Kane is CEO and Founder of Unbanked
