Bitcoin has been one of the best, or worst, investments, depending on when you bought in. Recently, events have caused Bitcoin’s price to drop to new lows relative to its position just a few months ago.
So, why has Bitcoin’s price dropped so suddenly? What changed about how Bitcoin works or how the market sees this asset? Let’s take a look at what happened to figure out where Bitcoin is going in the future.
Bitcoin, referred to as BTC, is the original cryptocurrency. It is a digital, decentralized currency that acts as a peer-to-peer exchange of value. By acting as a currency outside of the purview of one government or organization, Bitcoin can work in ways traditional currencies cannot.
Firstly, Bitcoin acts as a public ledger that offers pseudonymity to its users. Transactions are recorded on the blockchain using wallet addresses rather than user names or account numbers. Save for someone going out of their way to identify what wallet address belongs to which person, an individual can use Bitcoin without giving up their identity online.
Secondly, Bitcoin maintains value regardless of where in the world the coins go. Unlike national currencies, which have to be exchanged for one another, Bitcoin has the same value in every country. As long as a business or individual accepts Bitcoin, the amount of Bitcoin they receive stays static when Bitcoin doesn’t have market volatility.
Finally, Bitcoin runs on a decentralized network of committed hardware contributed by Bitcoin miners. These miners offer hardware processing power to the Bitcoin blockchain where they run advanced calculations to confirm transactions and add them to the transaction history on the blockchain. With this, no one outage across the world can stop Bitcoin transactions from happening.
This was the point of Bitcoin’s initial creator, Satoshi Nakamoto. In his whitepaper, Satoshi lays out the design choices and reasons for the subsystems of Bitcoin and how all the different participants in the Bitcoin ecosystem work together.
Bitcoin’s price is elastic, as can be viewed from its historical chart. Despite seemingly drastic peaks and valleys, there has been a steady climb upwards over the year, as we can see here:
The good news in all of this is that long-term holders have managed to secure gains for themselves, having ridden Bitcoin to be up 37.6% from a year ago. For comparison, the average return in the U.S. stock market is around 10% per year.
With this sudden price drop, people want answers on the why and how. Before we can know where Bitcoin goes from here, let’s look at what caused all the commotion recently:
At the beginning of January 2022, BTC saw a roughly €2,500 price down over a few hours. As is the case with many of the recent severe drops in price for Bitcoin, we can look to the leverage market for answers.
For those not familiar with it, leverage trading is when current assets are used to acquire more capital through lending on a trading platform. The supplied assets act as leverage for the borrower. By doing this, the borrower has both their current assets and extra cash to invest further.
This trick is great in a market expecting upward trends. However, when the price drops, borrowers can be liquidated. If that happens, it causes their leverage to be sold off to pay back parts of their loan. When enough of these events occur, the automatic market makers that many exchanges use to lower the price of Bitcoin as more coins hit the market.
In this case, almost €194.4 million was liquidated out of Bitcoin, triggering major sell-offs across the market. This, combined with recent news of increased interest rates in 2022, caused Bitcoin to fall so hard recently.
Whether you believe Bitcoin is a store of value, a way to exchange value across the Internet, or a new kind of digital asset, the fact remains that Bitcoin hasn’t changed between yesterday and today.
The liquidation events didn’t happen because a bad upgrade went out on the Bitcoin blockchain or a vulnerability was found in the code. Instead, market sentiment is what caused this price drop. The fundamentals of Bitcoin haven’t changed.
When all is said and done with this recent price dip, the fact remains that Bitcoin is still the original cryptocurrency, with all the features users know. In fact, the November 2021 price run-up of Bitcoin can partly blame the Taproot upgrade for that happening in the first place.
This decentralized system is what makes Bitcoin so fascinating for so many people. The ecosystem works because of the development and usage by people around the world. Rather than relying on a central organization, Bitcoin is stronger thanks to its broad user base.
This fact doesn’t mean that Bitcoin is the best, though. Plenty of other blockchains can process more transactions or have smart contract capability. Still, Bitcoin, with its deflationary supply and momentum, doesn’t appear to be going anywhere any time soon.
As always, predicting the price of Bitcoin moving forward is tough to say. This fact is especially true now that more and more institutional investment money has made its way into the asset.
In years before, Bitcoin mostly traded between individuals and smaller investment companies. Now, with names like Tesla and various banks getting into the mix, it’s hard to say if this will give Bitcoin a more solid price floor or if it will cause a larger crash when these big players leave the ecosystem.
With this recent liquidation event, Bitcoin would appear to be a weak investment from the outside. Losing almost 8% of your total value in one day is devastating for any asset that isn’t a cryptocurrency.
However, because the cryptocurrency space is so small compared to other markets, this volatility is part of the asset class right now. The market may view this price dip as a chance to grab some coins at a discount compared to where they were a day ago and the price comes back up in a week or less.
One thing is sure: Bitcoin historically sees a large return. While the past doesn’t tell us exactly how assets will trade moving forward, it’s reassuring to see major dips in Bitcoin’s price from before and still see the coin around today.