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For the last few years, Bitcoin was the darling of the investments world. Bitcoin single-handedly put the term “cryptocurrency” in everyone’s vocabulary. People who bought Bitcoin at low prices sold them exponentially higher. There were stories of investors who became “overnight millionaires” because of the cryptocurrency. The question on everyone’s mind was “Can I still buy?”
Then, the price of Bitcoin started dropping.
Investment soothsayers were proclaiming the cryptocurrency “near death”. Articles warning people to stay away from Bitcoin were showing up on the Internet, all over social media, and the TV networks.
If the drop of Bitcoin (BTC) wasn’t bad enough, came the news that more than $30 million of the cryptocurrency was stolen.
In this article, we will discuss 7 possible factors that could explain the fall of BTC. Before we get into that, we would like to give a brief summary of how the prices are determined, and why it is an attractive investment.
Bitcoin Pricing – Is It Anything Unusual?
Cryptocurrencies are not new to the market. These digital currencies have been around for 9 years; almost a decade. Cryptocurrencies such as Bitcoin are subject to the Law of Supply and Demand just like everything else. The more people want them, the higher their value.
Bitcoin and other cryptocurrencies are attractive assets because it provides an efficient way of transferring money via the Internet.
Unlike fiat money, securities, and stocks, the cryptocurrency market is not regulated or controlled by a central authority. It has no Central Bank. Instead, the market encourages trust and transparency by having its rules available to everyone investing in cryptocurrencies.
Bitcoin’s price is influenced by the forces of supply and demand. Like the traditional currency, cryptocurrencies are commodities that acquire value over time. If you buy them at a low price, you can profit if you sell them at a price higher than its purchase price.
The Advantages Of Bitcoin
The value of BTC and other cryptocurrencies is determined by the participants in the trading process – the people who buy and sell the digital currencies.
By way of comparison, fiat money’s value is derived from the government that issues them. Essentially, fiat money has value because “the government said so.” Precious metals such as gold derive its value from the material or substance of which it is made of.
Seamless Transfer And Inflation-Proof
The demand for BTC arises from its attractiveness to investors. It can be seamlessly transferred through the Internet and find its way to a digital wallet several oceans away.
Likewise, the number of cryptocurrencies has been pre-determined and therefore, has limits on its availability. For this reason, in times of inflation, BTC cannot be subject to a devaluation.
Free Of Censure
Investors of Bitcoin receive a private key which cannot be stolen or cracked open. BTC’s cryptography is high-level; it cannot be cracked open by the government. Bitcoin uses miners to secure the network with powerful computers.
Assuming the price of BTC increases compared to the value of fiat money, the miners are paid higher fees. This incentivizes the miners to use more computer power to add to the already formidable strength of the BTC network. At the same time, the incentives encourage the creation of a positive feedback loop.
So when Bitcoin was attacked and lost 30 million, it put into question the decentralized nature of cryptocurrencies because the hackers were able to gain control of the market.
Unmatched Computer Power
If you owned 51% of BTC’s hash power, you could potentially earn $20 million every day by mining bitcoins.
If you tried to hack the network to claim 51% of BTC’s hash power, you would need to spend a lot of money to use a computer that is more powerful than Bitcoin’s to get the job done.
Remember, the miners are incentivized and would contribute more computer power to the network.
Thus, trying to hack 51% of the hash power will cost you more. The unmatched power of Bitcoin’s power should be a deterrent to any malicious entity plotting to hack the system.
Is Bitcoin Volatile?
Like other forms of investments – stocks, currencies, commodities – Bitcoin’s market can become volatile. The volatility of BTC is measured by determining its strength versus its base currency which is the United States Dollar.
Compared to the foreign exchange market, the cryptocurrency market is small. It is not actively traded as fiat currencies because cryptocurrencies are not universally accepted. Thus, it doesn’t require much to cause the prices of BTC to rise or fall.
BTC’s volatility makes it more attractive to investors because there are opportunities to buy the digital currency at a lower price.
However, the ones who got really rich were the investors who bought BTC 5 years ago for under $100 and sold it when the price hit $10,000 to $20,000 in 2018.
7 Factors That Could Have Contributed To Bitcoin’s Fall
Fundamentals – the news and developments on the industry and the economy – are used as the basis for decisions to buy or sell an asset. Fundamentals affect the movement of stocks, commodities, and currencies. Bitcoin and the other cryptocurrencies are no different.
Unfortunately for BTC, the cryptocurrency economy has been hit by a massive slew of bad news:
• The US Department of Justice seized more than $20 million of Bitcoins from vendors operating illegally in the Darknet.
• Alibaba’s chairman Jack Ma advised traders against trading Bitcoins because he believes BTC is a bubble waiting to pop.
• Australia Reserve Bank Head of Payments, Tony Richards expressed suspicion in Bitcoins purported 4.5 transactions per second.
• Hackers from South Korea were reported to have stolen $31.5 million of Bithumb.
Bad news is perceived as red flags by the market. When prospective investors read bad news, it can discourage them from pushing through with the purchase.
Once the price starts to fall, it confirms the bearish trend and creates a ripple effect. More people are compelled to stay out of the market and the lack of demand continues to push the price down.
Here are 7 factors that are believed to have significantly contributed to Bitcoin’s decline:
Capital Gains Tax Benefit
A trend has developed whereby BTC investors sell their digital currencies before the month of April to avoid paying a large amount of taxes. As it turns out, if you sell BTC in the same financial year that you bought it, you would be taxed for short term capital gains which could go as high as 39%.
Bitcoin’s Cash Hard Fork
Competition between 2 Bitcoin groups, Bitcoin SV and Bitcoin ABC resulted in a hash rate tug-of-war that created market uncertainty.
Delay in the Launch of Bitcoin Futures
Bitcoin Futures was a much- anticipated offering from Bakkt, a company that is owned by the prestigious New York Stock Exchange (NYSE). However, Bakkt announced that the launch of Bitcoin Futures would be delayed by as long as a year.
BTC Manipulation by Tether
After Tether redeemed more than $500 Million from its Treasury wallet, suspicion arose that it may have been used to prop up the BTC rally the previous year. The suspicion was enough to warrant an investigation by the Department of Justice.
Fall in Hardware Sales
Investors were alarmed when Advanced Micro Devices and Nvidia reported that sales for cryptocurrency hardware had declined. The perception of the market was that cryptocurrencies had run its course and investors were looking for more stable placements.
Google Says No to Cryptocurrency Ads
Google, the biggest search engine on the Internet, announced the company was banning ads for cryptocurrencies to protect its users from possible fraudulent activities.
Unlawful Practices of ICOs
The SEC exposed the unlawful practices of 2 recently launched ICOs which sold unlicensed securities. The companies were fined but the damage on the reputation of cryptocurrencies as a safe and secure investment had been done.
It’s not just fundamentals or the news that are causing the decline of Bitcoin’s prices. There are technical or data- based findings that are supporting the idea Bitcoin’s price is trending on a downward trajectory.
• BTC’s trading volume has been declining for the past quarter.
• Searches about cryptocurrencies on Google Trends have been greatly reduced.
• A highly-speculative notice that BTC’s up and downs follow a monthly cycle. If the market is down on 06 June 2018, it will be up on 06 July 2018.
After setting a new bottom of $5,800, market analysts believe Bitcoin will continue its downward trend and eventually find its way to a new pricing low.