Bitcoin has long been the most popular and valuable of all cryptocurrencies, but it has recently begun to lose value. What variables influence the price of Bitcoin, and what does this mean for Bitcoin investors? Continue reading to learn why Bitcoin prices have plummeted and what the future holds for the cryptocurrency.
Bitcoin is one of the most prominent and widely used cryptocurrencies, which has lost value recently. With sagging markets, increasing inflation, and uncertainty about how the Federal Reserve will boost interest rates, you might think that now is the perfect moment to invest in Bitcoins. However, the most famous cryptocurrency that revolutionized the crypto industry has lost almost 20% of its value this year. Bitcoin’s price had dropped to $33,000 on January 24, 2022.
Bitcoin achieved an all-time high of $69,000 on November 8, 2021, just over three months ago. So, why is Bitcoin’s price plummeting so quickly? Is Bitcoin turning into a risk asset? On the other hand, risky assets are those that have a high level of volatility in the market. High-yield bonds, commodities, equities, and other high-risk assets have long been considered high-risk assets, but in the current environment, bitcoin has also become a risk asset.
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It’s also not the first time that Bitcoin’s market value has plummeted so dramatically. The price of Bitcoin dropped by more than 80% between 2017 and 2018. However, large firms such as PayPal and Fidelity did not invest in the crypto market around that period. So, right now, the actual question is: how will Bitcoin prices affect you?
How Bitcoin Price is decided?
Many investors are concerned about Bitcoin’s fragile prices and volatility. If you’re one of them, you’re probably wondering and attempting to figure out how and what influences Bitcoin values, as well as who determines them. Because cryptocurrencies are decentralized in nature, they are unaffected by the government’s monetary policy. Bitcoin, being one of the most widely used cryptocurrencies, is also decentralized, thus its value is unaffected by government policy.
So, what factors influence Bitcoin prices? Just as the value of US currency is influenced by demand and supply chain, the value of bitcoin is driven by demand. To put it another way, the price of Bitcoin is entirely determined by the demand for Bitcoin. As a result, as demand for Bitcoin declines, so does its value.
However, this is not how the company’s supply chain operates. Other market assets, such as gold and fiat money, may increase supply in response to increasing demand, but the supply of bitcoin is completely inelastic. Even if the demand for Bitcoin grows, there will be no increase in supply to fulfill it. As a result, the price of Bitcoin is heavily influenced by this factor.
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Unlike fiat currency, bitcoin does not have an endless supply, which can be issued indefinitely. Only twenty-one million Bitcoins will ever be in circulation, and that amount will never be raised. The pace at which new Bitcoins are generated is constant, although it diminishes with time. This is why the supply of Bitcoin is unaffected by the demand for Bitcoin.
Bitcoin investors and analysts believe that this will lead to market inflation in the future. Unlike fiat money, which is governed by government laws and has a low rate of inflation, Bitcoin’s supply is limited, and its capital is modest. That is why Bitcoin is so delicate and volatile. Its prices fluctuate in response to changes in demand.
Why Bitcoin Price is Going Down?
The dip in Bitcoin prices has been a source of concern for all Bitcoin investors. The values of Bitcoin were relatively stable until November 2021, but the current drop in prices has caused a stir in the whole cryptocurrency industry. So, why are Bitcoin prices falling? This is a subject that has been bugging everyone. What are the elements that are causing Bitcoin prices to plummet?
One of the most important factors is the new policies adopted by the US Federal Reserve. According to Jerome Powell, the Federal Open Market Committee (FOMC) will triple the monthly rate at which it underwrites asset purchases in December 2021. The Federal Reserve used this measure or policy adjustment to contain inflation. However, it has had a detrimental influence on Bitcoin’s value. Bitcoin’s value has been declining since then.
Another thing that is going to happen in the coming days is that Bitcoin will surely be adopted more widely and will be viewed as a more reliable option, but along with it, the value of Bitcoin will also go down. Tech stocks and cryptocurrencies like Bitcoin are losing their value because of the rise in interest rates by Fed. This policy is also greatly reducing the growth of many such risk assets.
Apart from the Fed’s actions, tensions with Russia along the Ukrainian border are also having a negative influence on Bitcoin prices. “Geopolitical worries are fueling market volatility in many tradable asset classes,” Reffet explained, “and Bitcoin has proved to be somewhat connected to broad market movements and less of a direct hedge against equities markets.”
Can Bitcoin Price Go to Zero?
The vast majority of individuals have now decided to invest in Bitcoin. Bitcoin had a terrific year in 2021, even though its prices plummeted in July, it regained its worth in November. However, given the recent decline in Bitcoin values and Russia’s declaration of full-fledged war on Ukraine, Bitcoin investors are wondering what would happen if Bitcoin prices sink to zero.
In 2018, two Yale University economists produced research called “Risks and Returns of Cryptocurrencies” in which they looked into whether the price of Bitcoin might ever drop to zero in a single day. The authors estimate that the probability of Bitcoin values plummeting to zero is between 0% and 1.3 percent. They also said that the euro had a 0.009% probability of falling to zero. Aside from that, cryptocurrency industry analysts believe that Bitcoin prices might quickly go to zero due to its fundamental worth.
However, some Bitcoin proponents argue that the value of Bitcoin will never fall to zero since it is supported by both mathematics and the trust of its investors.
What Should Bitcoin Investors Do?
So, what should you do today if you’re a Bitcoin investor? What actions do you need to take right now if you’ve put your hard-earned money into cryptocurrencies? First and foremost, calm down. True, Bitcoin prices have plummeted, and this is cause for concern, but similar price changes have occurred in the past with Bitcoin.
Due to changes in government regulations, the values of Bitcoin and other digital assets will begin to correlate, much like conventional assets like gold. So, if you’re a Bitcoin investor concerned about the cryptocurrency market and its price fluctuations, keeping an eye on both the larger financial market and Bitcoin pricing will be beneficial.
Bitcoin’s rate of growth has been pretty spectacular throughout the years. Although the price of Bitcoin has dropped dramatically in recent months, it was just $8,400 a few years ago. Furthermore, the price of Bitcoin cannot continue to rise at this rate indefinitely. So, if you asked me a few months ago if you should invest in Bitcoin, I would have told you that the odds are that you would be able to sell it for a much greater price in the future. However, given the current state of the market, you should proceed with caution before making such a choice.
True, there has been some uncertainty in the cryptocurrency market since the beginning of this year, leading traders to sell their Bitcoins, but Bitcoin is a strong digital asset with a historically increasing rate, so if you are a Bitcoin investor, you should not lose hope because the end of 2022 may bring positive changes in the cryptocurrency market for you.