The most popular cryptocurrency has seen a decline in recent weeks. Yesterday, the value of Bitcoin fell by Nine percent a day. what is going on?
The fact that established investors embraced bitcoin in the last year has one drawback: the price of the digital currency drops mercilessly if these big investors don’t suddenly like it anymore.
After a weak week or a weak start to the new year, the price of the cryptocurrency dropped below $35,000 on Saturday afternoon. Last November, a single bitcoin was worth $69,000. Since that peak, the decline has begun, and it has been especially difficult in recent days.
This drop in price nowadays is quite similar to the stock market. Compare the price of bitcoin to the average price of the five hundred largest publicly traded companies in the US, and you will see roughly the same up and down movements.
Higher interest rates
Lately up mostly down. One of the most important stock market indices in the US, the aforementioned S&P 500, has already fallen more than 8 percent since the start of the new year. Many company stocks are dropping in value as investors anticipate more interest rate hikes in America. The American umbrella organization for central banks, the Federal Reserve, has been mentally preparing investors for this for months.
It now appears that the Fed will raise its key interest rate for the first time in March, only to implement more rate increases later. Policymakers are also openly toying with the idea of raising interest rates in other ways, for example by phasing out emergency support for the coronavirus faster than previously planned.
eggs for their money
High interest rates are taking a hit on risky investments, and bitcoin is one of them. Investors then choose eggs for their money, take it away from stocks and cryptocurrencies, and then put their money into safe government bonds. This pays off more the higher the interest on those government bonds.
As a result, the currency has lost much of its value that it had accumulated last year in recent weeks. That value rose from about $10,000 in September 2020 to nearly $70,000 a year later.
This was mainly because large investment funds, for example those of some US insurance companies, put a small part of their invested assets in bitcoin. Due to the limited supply of the digital currency, this immediately drove its price up.
According to analysts at investment bank JP Morgan, these large investors did so to hedge against rising inflation. Bitcoin is sometimes seen as the new gold: there is only a limited amount of it, and this is how you must protect it from currency devaluation.
Ironically, the high inflation in recent months is precisely the reason why the currency has not performed well. This high inflation is the reason why central banks are raising interest rates, and that higher interest rate causes the price of Bitcoin to drop again.
Many supporters of the currency do not see it as an investment goal, but as a future payment method. They are less concerned with the daily exchange rate and believe that the current monetary system of central banks will eventually expire. According to them, Bitcoin could offer an alternative. Last fall, El Salvador, a small Central American country, was the first to take the step of announcing a legal tender for cryptocurrencies.
On the other hand, there are different governments holding the strings. For example, last Thursday the Russian Central Bank argued that Bitcoin should be banned altogether. Currency mining should also be banned, according to the Bank of Russia.
This means that Russia will go after China, which already imposed such a ban last fall. It remains unclear whether Russia will actually go in this direction. It is clear that such advertisements do not benefit the price of the currency.
This is not the first time that the cryptocurrency has experienced sharp declines. Last summer, the value briefly fell below 30 thousand euros, after exceeding 60 thousand euros in April. Then the coin quickly jumped again.
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