Bitcoin (BTC) is the grandfather of the cryptocurrency world. Its market capitalization represents around 40% of the total money invested in cryptocurrencies, and it is by far the largest and most established coin. Unfortunately, Bitcoin has had a tough couple of months. It has dropped about 8,5% since the beginning of the year, according to data from CoinMarketCap. It has lost nearly 40% of its value since its November high. Here are three key reasons for the recent Bitcoin crash.
1. Uncertain economic conditions
There is a lot of uncertainty right now, which has caused the stock market and cryptocurrencies to fall. On top of the omicron variant, the Federal Reserve said it's time to tighten monetary policy. This means it could raise interest rates as early as March. With less cash around, investors are moving away from riskier asset classes like cryptocurrencies.
2. The change in the narrative
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 happened in recent years. But if there's more money out there, every single dollar has less value - $ 50 doesn't go as far on your living costs as 10 years ago.
On the contrary, there will only ever be 21 million Bitcoins. So, if the dollar loses value and Bitcoin doesn't, Bitcoin should be a safer asset class. But critics argue that this story doesn't hold up. If Bitcoin were a good hedge against inflation, its price would be on the rise right now. The problem is that inflation has risen 7% in 2021 - faster than it has risen in 40 years - and the price of Bitcoin is falling.
The other argument is that a good store of value must be something that is long-term secure, not a volatile, speculative asset. However, the Bitcoin bulls argue that it is too early to tell. Bitcoin may also be a safe haven asset in the future, but there are too many other factors affecting its price right now.
3. Bitcoin Mining Problems
Faced with 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. Kazakhstan is responsible for about a fifth of all Bitcoin mining, for which internet access is required, but the internet in the country was down for six days in January.
A number of Bitcoin miners have shifted their operations from China following the cryptocurrency crackdown last year. They were initially drawn to the cheap energy prices in Kazakhstan, but now that the country faces an energy crisis, it is changing its pro-mining stance. Now they may need to move again; the question is whether they will go to places with a lot of renewable energy, given that the enormous energy consumption of Bitcoin is a major environmental problem.
Should you buy Bitcoin?
Bitcoin is unlikely to produce the kind of jaw-dropping returns we've seen from various altcoins last year. But the fact that it has been around for so long makes it more likely to survive a major market crash, and it's 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 to risk. If you have no money to spare or are worried about achieving other financial goals, now is not the time to buy crypto.
On the other hand, maybe your emergency fund is full, you are good with your retirement savings, and you were already thinking about buying Bitcoin. If so, now may be a good time. It certainly makes sense to make sure that Bitcoin accounts for a good chunk of your total cryptocurrency investments.
If you decide to buy Bitcoins, try to think long-term and make sure that cryptocurrency only represents a small part of your overall investment portfolio. That way, if Bitcoin drops further, or if the cryptocurrency market collapses completely, it will be disappointing, but not financially devastating.