Why is the price of Bitcoin crashing?

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Dabbling in Bitcoin is a rollercoaster ride of epic proportions for investors, and 2022 promises to offer more of the same.

Bitcoin and a host of other crypto prices riding on the market leader’s coat tail delivered big profits and distressing losses during the past 12 months.

All the reasons for the gains and falls are still affecting the crypto market, so will the push from investors shove Bitcoin through the $100,000 ceiling or is crypto in freefall?

Patterns in the madness

Bitcoin was trading at $50,000 a month ago and had even hit the heady heights of a record $69,000 in November.

Since then, the trajectory for crypto has been downhill with a slight recovery after several cliff-top drops.

In effect, Bitcoin has tumbled back to last summer’s price before the climb to $67,550.

Analysts argue crypto is not immune from geopolitical forces. The US Federal Reserve’s money tightening stance towards raising interest rates coupled with political unrest in Kazahkstan are the main drivers behind the price fall.

Why is turmoil in Kazakhstan so important?

Well, since China outlawed crypto mining, miners have looked elsewhere as a base, with Kazakhstan and the US the likely destinations. In Kazakhstan, the government has switched off the internet for periods, disrupting Bitcoin mining operations in the world’s second-largest mining community.

Elsewhere, the impact of the Omicron COVID variant and the spectre of rampant inflation playing havoc with leading economies stopped many from investing.

It’s no coincidence that the latest drop in value coincided with a NASDAQ sell-off that followed the Federal Reserve’s report about a change in tack for the economy.

What the price crash means to invesstors

The Bitcoin price crash is most damaging to new investors who have bought into crypto while the market is high.

The drops in value have wiped around $15,000 off the face value of Bitcoin, which for new crypto investors represents the gains made at the end of 2021.

Those who sat tight for longer would have bought cheaper and made more than a $15,000 gain – but still would have made a small margin on trading each coin.

Central banks set to take control of crypto

Central bank digital currencies (CBDCs) are set to take centre stage in the world of crypto.

CBDCs are not cryptocurrencies because they are controlled by a central bank instead of living without regulation on a peer-to-peer network blockchain.

Several countries are investigating the introduction of a digital currency, including the UK.

The Bank of England says the exchange value of a digital pound will always be tied to the value of the paper currency – so £10 of CBDC buys the same as £10 of paper currency.

Whereas Bitcoin is hosted on the internet and has no link to a paper currency, a UK digital currency would be tethered to the pound and interchangeable as a means of payment.

Tethering a Britcoin with the pound takes away the volatility in pricing that typifies most cryptos.

The Central American republic of El Salvador has already switched to a Bitcoin economy, with the crypto classed as legal tender. That makes Bitcoin gains exempt from tax, while expats investing three Bitcoins in the nation can apply for residency.

The next nation expected to make the crypto jump Jamaica with the issue of a CBDC within three months.

Why create CBDCs?

The advent of CBDCs is all about who controls a nation’s economy. Cryptos have grown in popularity in the past ten years because they are decentralised and unregulated. A CBDC is the exact opposite – under central control and highly regulated.

Governments fear cryptos could undermine their economies, so they will take the benefits and shape them for their purposes.

For example, CDBCs are automated, faster than interbank transfers and cheap. However, they also throw up the question of if we will need banks if payments switch to a CBDC.

Bitcoin and the crypto market

Bitcoin is by far the most significant player in the cryptocurrency market.

Launched more than a decade ago, Bitcoin is the original crypto. Currently, a Bitcoin is worth $41,692 with a market cap of $785 billion. Collectively, the rest of the world’s 3,000 or so cryptos are worth around $1 trillion – giving Bitcoin dominance over 75 per cent of the market.

The next biggest player is Etherreum, worth $3,183 a coin with a market cap of $376 billion, with Tether in third place, worth $0.99 and a market cap of $78 billion.

Why is the price of Bitcoin crashing FAQ

What is a CBDC?

CBDC is short for central bank digital currency. A CBDC is a central bank controlled online payment system that allows registered users to make digital payments.

A CBDC differs from cryptos like Bitcoin or Ether because a central bank supervises the system. Crypto has no central control and resides on a peer-to-peer network that calls on several computers to verify transactions.

What is Bitcoin mining?

New Bitcoin is generated when miners solve complicated equations to release the crypto from the blockchain – the underlying database which tracks and monitors the crypto. Successful miners are credited with a Bitcoin reward for releasing the new blocks of coins.

Miners also earn fees from confirming transactions on the Bitcoin network.

I can’t afford a Bitcoin – can I still invest?

Yes, you can still invest, but you need to check crypto exchanges to find out their lowest transaction values. Bitcoin can be split into much smaller slices, bridging down the investment cost, but not all exchanges will slice up Bitcoin as this increases their costs and eats into profits.

What if someone creates better crypto than Bitcoin?

Who knows what the future holds for Bitcoin. It seems central banks want to take the best bits from cryptos to integrate with their digital payment systems. Of course, this presents some uncertainty for the future of Bitcoin, but there is nothing stopping developers from taking the best bits of a CBDC and improving the way Bitcoin works.

What will happen to cash if CDBCs come in?

The majority of financial transactions are already electronic and spending cash is in decline. If the POund goes digital, most people would probably not notice.
What does 2022 hold for Bitcoin? As the price plunges and central banks flex their muscles to develop digital payments, the stage is set for a make or break time for the world’s leading cryptocurrency.

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1 thought on “Why is the price of Bitcoin crashing?”

  1. If CBDC’s come to be, you will lose all privacy regarding all of your financial transactions. And the CDBC’s can be used to contol your freedom of spending such as where you are allowed to spend and even time limits on when you can spend. And your money can be completely frozen at any time should you not conform to any arbitrary rules set by Fed or Government. “Oh you voted for wrong person, no money for you. Oh, you had three coffees so far this week, for your health and safety we are disallowing you to spend any more money for coffee the rest of the week.” If you want complete government control and tyranny of your money, CDBC’s are for you.

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