The price of bitcoin has fallen below $20,000 amid deepening turmoil in the cryptocurrency market. This drop comes just about a month after the cryptocurrency Terra (Luna) collapsed, losing more than 99 per cent of its value.
This drop in Bitcoin's price is fueled by multiple drivers which collectively have caused serious damage to world's first blockchain based currency.
Inflation has hit 40-year high in the UK back in May 2022 at around 9% along with US inflation around rising to 8.3%. Russia-Ukraine war has been a major driver in rising inflation as US sanctions has caused many countries to stop their imports of Energy from Russia further driving the Energy prices. The war started at a crucial point, where the world was already coping with the supply-chain shortages caused by Covid-19 pandemic and China’s zero-covid restriction policy in early 2022.
This rise in inflation is causing institutional investors to take a cautious approach and moving their funds into more risk-averse domains.
This increased inflation has caused Central Banks to react in order to meet their inflation rate targets. One lever that Central Banks use to curb inflation is by raising interest rates. The Federal Reserve in US have hiked the rates three times this year, while UK Bank of England raising it consecutively 5 times this year. More interest hikes are expected in the remainder of this year carrying on to the next year.
The rising interest rates cause economies to slowdown as borrowing becomes expensive. This leads countries into recession. Investors runaway from risky assets in slightest sight of hampered growth. Moreover, even investors with modest appetite to risk are staying cautious with combined inflation and growth slowdown concerns.
Whilst bitcoin being a revolutionary digital asset, a lack of regulatory oversight or implicit government support make it susceptible to scams and wild functions in the price. The anonymous nature of transactions making the price to manipulated by dishonest/fraudulent market participants. This lack of regulation has led to some companies promising unstainable gains. For example, Celsius advertises to its users that they can get a yield of 18% through the platform. Users deposit their crypto with Celsius. That crypto is then loaned out to institutions and other investors. Users then get yield as a result of the revenue Celsius earns.
Recently, Celsius took a decision to pause withdrawals of its customers providing “extreme market conditions” as the reason. With a customer base of 1.7million investors, this adds fuel to the fire as it causes further panic among the investors which start unloading their holdings in bitcoins and converting into safer assets.
The 3 core reasons for declining Bitcoin price are rising global inflation, rising interest rates and risk of subsequent declining economies and finally lack of regulations on the industry. Whilst the effects of first 2 reasons are expected to continue to early 2024, we can expect US Senate to agree on a legal framework in recent future. Earlier this month, two US senators have already issued a proposed bill to regulate digital assets. I will provide an overview of the proposed bill in my other post.
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