Breaking news!
The king of cryptocurrencies, Bitcoin (BTC), has fallen to its lowest level this year!
As of 11 May 2022, BTC fell below $29,000—its lowest since July 2021.
Even though the news of BTC crashing and rising might not mean much to you, especially if you don’t have any investments in it, you might still wonder what determines the price of the cryptocurrency and why its price is unstable.
This article answers all your questions.
Since its inception, Bitcoin (BTC) has witnessed highs and lows, with the most recent of the latter occurring on 9 May 2022, when the coin fell below $33,000—its worst hit since hitting its peak in November 2021. BTC is taking a hit along with other cryptocurrencies. In recent days, almost $300 billion has been lost in cryptocurrency value.
As expected, traders and investors fear for their fortunes, and this downward trend has been predicted to last for some days. The crash in cryptocurrencies can be linked to investors and traders cutting down on their stocks and currencies to cushion the effects of rising inflation rates across the world. This can also be linked to the primary determiner of the price of Bitcoin (in this article), demand and supply.
This may seem like basic Economics lessons, but it’s not exactly straightforward. We will break it down.
As you already know, BTC is not issued by any central bank or legally backed by a government, and government monetary policies do not bind it. It is also different from stocks and bonds because whilst buying stocks will grant you ownership in a company, buying bitcoin will only grant you ownership of your money’s worth.
For BTC, its price is determined by its supply, market demands, availability, rival cryptocurrencies, and the emotions of investors. Bitcoin is in limited supply, i.e., we will reach a certain point where bitcoin will no longer be mined—projected to be 2140. A specific amount of Bitcoin is created every year, and this rate is reduced every four years. This means that the supply of bitcoin is dwindling, which puts it in the spotlight on increased demands. With cryptocurrency gaining more popularity in nations and cybercriminals, the demand continues to grow, but why does the price fluctuate?
Competition
Bitcoin, no doubt, dominates the cryptocurrency market, but this dominance is waning. With the rise of alternative coins and their increased awareness, traders and investors are gradually shifting away from BTC. Ethereum (ETH), for instance, is perhaps Bitcoin’s biggest rival because of a surge in decentralised finance (DeFi). New coins are introduced daily, making the cryptocurrency market more saturated than ever. Regardless of the competition, Bitcoin continues to be the standard for the crypto space and receives attention.
This attention has also played a part in the fluctuation of BTC’s price. When investors become too excited over an asset, it becomes overvalued, and there is a surge in its price. A very clear example is Elon Musk and Dogecoin. While he promoted the coin, it increased in value only to crash after the hype and attention reduced.
Regulations and Governance Policies
Despite the push for cryptocurrency regulations by governments and other parties, Bitcoin is unregulated, and its operations are regulation-free. However, the lack of regulations has made some governments like the Chinese crackdown on it. This also influences the price, as we witnessed in September 2021 when trading bitcoin was banned in China. This made the price fall from $51,000 to $41,000. However, it recovered from the crash and managed to stay strong until it recently hit its all-time low for the year.
Bitcoin also has governance policies that are set by its major developers. Uncertainties about the price arise when protocol modifications that affect the existing number of Bitcoins are made and when developers disagree about the future of BTC. These uncertainties trigger concerns in traders and investors and consequently affect the price.
Whale accounts
Whale accounts are accounts owned by individuals who own huge amounts of specific crypto tokens. In the case of Bitcoin, numerous whale accounts own from about 100,000 to 1,000,000 BTC. These accounts can also influence the price of BTC, seeing as it is limited in supply.
We can blame the recent crash of cryptocurrencies, especially Bitcoin, on the reduced interest by investors and traders due to inflation. This may not come as a surprise for some who were aware of the predictions of increased price instability in 2022. Bitcoin is still relatively new and requires a lot of development to reach its full potential.
Since Bitcoin has stuck around for over a decade now despite the volatility, we can hope for the same resilience in the years ahead until its adoption has a wider reach amidst more price fluctuations.
In the end, Bitcoin is only valuable because it has been deemed so, and for as long as it is traded, it will remain valuable.