Throwback To How Bitcoin Has Been Performing In 2022
Bitcoin prices are being encircled by a variety of factors, with the crypto struggling to surpass $25,000. Bitcoin (BTC) has been hovering around the $20,000 mark for several weeks after the coin lost more than 60% of its value since its November peak. The recent drop has wiped out its market cap by more than $600 million and raised growing concerns about a bubble bursting.
Crypto investors have been on edge since Bitcoin plummeted to around $20,000. Many of them fear that further record sell-offs by major players could trigger another downtrend. Further declines are likely to amplify losses and hamper the market’s recovery in the medium term. Therefore, many investors are reluctant to make further investments. In addition to the crypto crash, the closure of crypto companies such as Three Arrows Capital (3AC) and the Celsius Network has had a negative impact on crypto investors. Singapore-based hedge fund 3AC, for example, collapsed with around $10 billion in investor funds. It is having a hard time paying its creditors and investors. Crypto lending network Celsius which is revered in crypto circles, also experienced tough times as the crypto market crashed. The company was forced to suspend payments to creditors and customers due to low liquidity. Such incidents have shaken investor confidence in the industry and reduced the capital inflows needed to support crypto like Bitcoin.
A liquidation occurs when a money broker forcibly closes an investor’s guaranteed position due to a loss affecting initial margin. Liquidations often amplify market declines by inadvertently increasing the number of selloffs. For example, on Jan 11, approximately $2.7 billion worth of BTC futures contracts were settled in 24 hours, causing prices to drop from approximately $41,000 to under $32,000. A similar thing happened on June 14, causing bitcoin prices to plummet by 15%. As a result, around $532 million worth of Bitcoin was liquidated. While liquidations affect prices in the short term, they negatively impact asset prices as market turmoil increases, creating uncertainty. Uncertainty is bad for business because it prolongs fear cycles.
USA Federal Reserve’s impact on Bitcoin
Inflation refers to the reduction in relative purchasing power using a country’s base currency. High inflation generally leads to increases in the prices of basic goods and services and is usually characterised by steady income rates. In May, the US Consumer Price Index reached 8.3%. For comparison: 0.3% in April 2020, when the COVID-19 lockdowns began. Many analysts believe that the high rate of inflation is caused by the US government’s aggressive fiscal policy in 2020 in response to the COVID-19 pandemic.
The government cut Federal Reserve interest rates to zero and launched a $5 trillion stimulus package to avert economic disaster, far more than the $787 billion used to quell the 2008 recession. Funds deployed during the pandemic stimulated the economy and helped stimulate demand for goods and services. However, supply chains have not been able to keep up with the growing demand for certain commodities, hence the rise in commodity prices. Of course, there are other complicating factors, such as the war in Ukraine, which has affected oil prices and led to higher transportation costs. These elements have led to a higher cost of living and lower investments in instruments like Bitcoin due to lower disposable income. That being said, Bitcoin Prices could recover once current socio-economic dynamics improve.
In March, the US Federal Reserve raised interest rates for the first time since 2020. At the time, Bitcoin prices didn’t move much as the interest rate was already factored in. However, the announcement prepared investors for the upcoming changes and caused a gradual decline. On June 15, the Fed raised interest rates again, this time by three-quarters of a percentage point, the largest hike in two decades. The anti-inflationary measure sent markets tumbling down in the days that followed. The Dow Jones was down more than 700 points, while the S&P 500 fell 3.4%. Notably, a few days after the announcement, Bitcoin investors began withdrawing from the market, resulting in prices falling from $30,000 to $18,900 between June 7th and June 18th. The reaction was expected because the Fed had already indicated that it would hike rates. Historically, Fed rate hikes reduce investment in assets like Bitcoin.
Bitcoin in 2021
For Bitcoin the year 2021 was amazing as it created its new all-time-high of $68,789 on November 10th. The crypto ended the year up around 60%. However, this was a nearly 300% increase since the start of the COVID-19 pandemic. Consequently, a pullback was almost inevitable due to the market overheating. Market corrections occur frequently and are a natural occurrence in both the stock and crypto markets. They are usually caused by economic shocks that cause investors to withdraw money from volatile markets. Major market corrections usually give way to a bear market, especially when there is a sudden drop of more than 20%. The current crypto winter is the result of a variety of factors, including geopolitical tensions and uncertainty amid reports of a possible recession. The Bitcoin market is most likely to rebound once the asset has overcome these aspects.
Future of Bitcoin
Bitcoin is likely to bottom out in the medium term and this will allow the asset to gain some stability, enough to reassure investors and lead to bullish sentiment. A healthy market has its ups and downs. This current period is one of consolidation and will gain momentum as many who have been waiting for a better price start buying. Institutions and large Fortune 500 companies are likely to add some crypto to their balance sheets in the coming months.
Disclaimer: This report is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. The Company has prepared this report based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. This report is preliminary and subject to change; the Company undertakes no obligation to update or revise the reports to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Trading & Investments in crypto viz. Bitcoin, Bitcoin Cash, Ethereum, etc. are very speculative and are subject to market risks. The analysis by Author is for informational purposes only and should not be treated as investment advice.
