5 min read
The crypto world is experiencing a bit of a sore head recently. The world's biggest cryptocurrency has recently recorded a 15% decrease just days after reaching a record. Last year, several financial institutions threw their weight behind cryptocurrencies which sent their prices skyrocketing, helping them gain more popularity in recent months, especially bitcoin, but this has changed in 2021.
Bitcoin recently hit a record high of $64,869.78 ahead of the debut trade for the cryptocurrency exchange Coinbase Global Inc. It is cited that there is a blackout in China's Xinjiang region as well for the fall, which allegedly powers much of Bitcoin mining - the process by which new bitcoins are entered into circulation.
The Unexpected Bitcoin Price Fall
On a surprising turn of events, bitcoin has hit a day-low of $53,302 in the early hours of Sunday the 13th of April 2021. Currently, it has regained some lost ground. Bitcoin's flash crash saw a new record in liquidations, resulting in more than one million positions being wiped off the books.
In late February, Bitcoin saw a retreat to as low as $43,000 amid uncertainty in the traditional markets over stimulus expectations and their positive effects on U.S. bond yields. Bitcoin prices have been up and down over the past few months as governments and regulators hone in on the sector amid rising demand.
In some countries such as Turkey, the Central Bank of Turkey has recently banned cryptocurrencies and other digital assets for payments. This was motivated by a lack of central authority regulation and lack of supervision mechanisms for cryptocurrencies and other similar digital assets.
In addition to this, among other risks, cryptocurrencies may cause non-recoverable losses for the parties to the transactions due to a lack of regulation.
Reasons Behind the Massive Fall of Bitcoin Prices
1. Regulatory Uncertainty
The United States regulators have always had a dysfunctional relationship with Bitcoin. Several online reports attributed the plunge to speculation that the U.S. Treasury may crackdown on money laundering carried out through digital assets. Rumour has it that the United States is planning to implement a mechanism to become empowered to monitor the users' crypto wallets. Bitcoin lacks a central authority, making it highly vulnerable in causing a decline in its prices.
2. Funding Stress
Bitcoin generally looked overheated together with other cryptocurrencies. The Asian session drop was likely a funding reset needed for a sustained move above $50,000. The cost of holding long positions in Bitcoin's perpetual future market, also known as funding rate, rose to a 12 month high of 0.109%, recently indicating overheating in the market excess bullish leverage.
The average funding rate began climbing at the end of January and surged to multi-month highs in the wake of Tesla's disclosure of Bitcoin investments. This further suggests that the recent rally from below $40,000 was driven mainly by leverage on derivatives even though there was always the risk of funding reset.
3. A Healthy Pullback
Many people believe that the price drop was to be expected, and it is, in fact, a good thing for Bitcoin. This allows Bitcoin to let out a bit of steam before it ascends dramatically new heights, especially since its price trend is still similar to the pullbacks before that ranged around 20% in the recorded bull runs in the history of Bitcoins.
4. Bitcoin Whales
According to Ki-Young Ju, the CEO of CryptoQuant, the drop in Bitcoin prices can be somehow channeled back to crypto whales who began to deposit large volumes of their Bitcoin holdings to exchanges to cash in on BTC's record highs. 'It is pretty similar to what happened in the bull run of 2017 when whales highly contributed to a significant shift in the value of the cryptocurrency by moving their assets to other platforms instead of Bitcoins.
5. Investor Caution
The impact of the average trader cannot be underestimated. There is still a large group of investors and holders who carry the 2018 "Crypto Winter" scars and who have waited patiently all these years to recoup their previous losses or have a second chance at redemption, that is, to sell their BTC at higher prices.
Until Bitcoin fulfills the yonder between those two stacks of high society, it is still anybody's game, and investors are fully aware of this. As a result of this, when the price dips sharply, nerves get frayed, and sell buttons get pushed. As much as many Bitcoin holders may propagate the unstoppable rise of the currency and predict future highs in the number of dollars, they might not be that optimistic in private.
What Can We Expect in The Future for Bitcoin?
Will Bitcoin experience such drops in prices soon again? Will it experience the same sort of explosive returns that characterized its latest bull market, or will it slip below in the absence of industry-wide catalysts? While these scenarios are possible, a deeper downturn is not out of the question when considering the technical analysis and the market fundamentals. Bitcoin has always been the dominant crypto asset, and digital gold still represents a higher percentage of the asset's total market capitalization.
But whichever direction the cryptocurrency goes in, this is by no means an indication that the market is immature. It is showing the opposite scenario in which Bitcoin remains a market leader. Bitcoin is the gateway crypto asset for investors, and higher chances it will remain the dominant asset in the market today.
When will the next price drop come? You may also wonder but with so many external variables in the present world, predicting when Bitcoin's bull run will ever end is still tricky. It is almost impossible to determine the next steps of crypto whales and how existing positions in the market will move.
Every business has its downfalls and challenges. It is through challenges that companies can raise massively. Bitcoin is not excluded from this either, and this should not be a reason to change your mind on whether or not to invest with Bitcoins.