Bitcoin (BTC) has been hovering around $20,000 for several weeks now after it lost more than 60% of its value from its peak in November.
The recent drop has wiped more than $600 million off the market cap. its market and raised concerns about bubbles bursting. Bitcoin price is affected by a multitude of different factors and it is struggling to break through the $25,000 mark.
Negative investor sentiment
Since Bitcoin dropped to around $20,000. Many of them fear that the unprecedented sell-off is not over yet and could lead to a larger downtrend. As a result, many investors are holding back on additional investments.
Besides, the decline of important crypto companies such as Three Arrows Capital (3AC) and Celsius (CEL) also had a negative effect on investor sentiment. Such incidents have damaged investor confidence and reduced the capital flow needed to support cryptocurrencies especially Bitcoin.
Margin and liquidation calls
Liquidation occurs when an asset broker is forced to close an investor’s mortgage position due to a loss that affects the initial margin. Liquidations often amplify market declines by inadvertently increasing the amount sold.
For example, on January 11, around $2.7 billion worth of BTC futures contracts were liquidated within 24 hours, causing the price to surge from around $41,000 to under $32,000.
A similar incident happened on June 14 and caused the Bitcoin price to plummet by about 15%. As a result, approximately $532 million worth of Bitcoin was liquidated.
High inflation often leads to an increase in the price of goods and services leading to an increase in the cost of living, which indirectly reduces investments in Bitcoin due to the high risk income.
In May, the US Consumer Price Index reached 8.3%, the highest level in four decades. For comparison, it was just 0.3% in April 2020 before the COVID-19 outbreak. The US government at the time had to launch a stimulus program worth $ 5 trillion to prevent an economic disaster, much more than the $ 787 billion used to quell the recession in 2015. 2008.
Federal Reserve Interest
On June 15, the Fed raised the lending rate again, this time by 0.75 percentage points to 1.5%-1.75%, the highest increase in two decades. The anti-inflation measures sent the market down in the following days. The Dow Jones Industrial Average fell more than 700 points while the S&P 500 fell 3.4%.
Immediately Bitcoin investors began withdrawing from the market a few days after the announcement, causing the price to drop from $30,000 to $18,900 between June 7 and June 18.
This reaction was expected because the Fed had warned that it would carry out a rate hike. Previous Fed rate hikes dampened investments in speculative assets like Bitcoin.
2021 is a positive year for Bitcoin. The cryptocurrency ended the year with a gain of around 60%. However, this number has increased by nearly 300% since the COVID-19 pandemic began. Therefore, a price drop is almost inevitable.
Market corrections happen frequently and are a natural occurrence in both the equity and cryptocurrency markets. They are often caused by economic ‘shocks’ that cause investors to mercilessly withdraw money from the markets.
The current crypto winter is the result of a multitude of factors including geopolitical tensions and uncertainty amid reports of a possible recession.
What will happen in the near future?
To create optimism for investors. Yubo Ruan, founder and CEO of Parallel Finance, a decentralized finance (DeFi) lending and staking protocol, says that the market is in a transitional phase:
“I think a healthy market will have lows and highs. This current phase is a time of consolidation and will gain momentum as many have been standing on the sidelines waiting for better prices to start buying. Institutions and large Fortune 500 companies are likely to add some crypto to their balance sheets in the coming months.“
Konstantin Boyko-Romanovsky, CEO and founder of non-industrial staking and storage platform Allnodes said:
“The bear market allows us to be introspective. It’s time to slow down the race to see which is the best cryptocurrency. Blockchains that have been hit hard during the recent market crash may have to take a deeper look at what needs to change to stay competitive and profitable in the future. With that said, the crypto market and the traditional market will recover. It is a matter of time.“