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Tuesday, April 23, 2024

What’s Behind Bitcoin’s Drop? What To Know Before Investing 

Everybody knows that cryptocurrency values are very volatile. Yet, whenever there’s a dip or major drop like has happened recently with Bitcoin, people are shocked. 

Although the latest drop was bad news for investors, it is nothing that hasn’t been seen before. Not only that, but it isn’t always such a bad thing when cryptocurrency values or the stock market take a dive periodically. If you are on the outside looking in, it can be a very enticing opportunity if you know what you are doing. 

To understand if this is a big opportunity or a sign to stay away, you first have to understand the dynamics that caused the drop. For instance, some factors that led to the crash may give you pause and rethink investing in crypto, or they could simply change your strategy and buy ETH in Canada instead of Bitcoin. 

In this article, we will go over what to know about the crash and give you the information to decide for yourself what you should do. 

 

Inflation

Just about the entire world is experiencing a rise in prices for common goods. Inflation is on the rise due to higher production costs, supply chain issues, and a variety of other factors that usually go into it. People are feeling the crunch of high prices in just about every aspect of their lives. 

Bitcoin was supposed to be the answer to a lot of problems that come with fiat currency and inflation was one of them. However, there are factors that made Bitcoin and other cryptocurrencies as susceptible as any other type of investment. One of the reasons is that when inflation hits, interest rates rise. This is a powerful motivator for people to put their money into the bank or other savings accounts to get a proven and reliable interest rate.

Bitcoin comes into the equation because people don’t usually have money lying around to put into those savings accounts. Usually, they sell off some shares of stocks and even cryptocurrency. This sell-off affects the value just as it has tech stocks which have also taken a tumble for the same reason. 

As there are more incentives to be fiscally conservative, the risks of playing the market or investing in cryptocurrency look less appealing. 

 

Maturity

For a long time, Bitcoin and cryptocurrency, in general, were in the realm of hobbyists. The people buying were mainly enthusiasts about a new technology that could usher in Web 3.0, or would disrupt the financial systems and give people a democratic style currency. 

For almost a decade, this is exactly what they were. In fact, the first Bitcoin transaction was made to order a pizza. While the promise of what cryptocurrencies could be is still somewhat intact, there has been a maturity in reality. 

There are now many financial institutions that are backing, and buying cryptocurrencies just as they would foregin currencies. Even regular people have adopted the currency into their lives while not knowing much about the way that they work. 

This maturity has led to it being just another part of the mainstream financial systems and makes them susceptible to the same forces that cause busts and booms in other markets. For instance, many institutions have margin calls for cryptocurrency that automatically sell off portions when there is a decline in value. This causes a sell off and spooks regular investors who then sell their shares. 

All of these things are now tied in together which makes it harder to use cryptocurrency as a value store like gold or other commodities. 

 

Government regulations

Another big reason for the bust of Bitcoin right now is that there are a lot of happenings when it comes to how governments are treating cryptocurrency. There are some countries that are making it illegal to do cryptocurrency mining because of the high demand in the energy sector. Energy prices are rising in general and countries that have a lot of mining operations are seeing price surges in addition that are impacting regular people. 

Some countries like China, have a very hard stance against cryptocurrency in general which also has a chilling effect on the market. Add in that even the US government is looking like it is going to start regulating cryptocurrency and these are all factors that cause people to sell and the value begins dropping. 

Even though there are many people who would welcome more government oversight so it could reduce the volatility, there are others who are not interested in cryptocurrency if it means having to deal with regulatory agencies. Since the mission for Bitcoin was originally to not be a part of these institutions, any regulations or oversight will be seen as a failure to live up its promise. 

 

Should you invest?

There is no way to look into a crystal ball and see what lies ahead for Bitcoin. Things could continue to fall for some time and never recover. On the other hand, this could be the nadir and things go right back up to record highs in the next few months. 

Although buying when things are this low is usually a good idea, these factors that have gone into the Bitcoin bust are still present and will affect the price for a while. Any investing should always be considered a risk even when you buy something steady like index funds. There is always the chance that you lose money. 

Another thing to consider is that you only lose money when you sell for less than what you bought the cryptocurrency for. If you buy now and it continues to slide, you may simply need to be patient and wait for the value to rise at some point in the future. 

The government oversight may actually prove to be a good thing and values start rising once the regulations they intend to enact are clarified. If the past is any guide, the possibility of Bitcoin reaching new highs again seems to be entirely possible. 

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