What Would Cause Bitcoin To Lose Value?

Cryptocurrencies have been a major source that has helped people step into the world of investments and trading. Considering the crypto trends of 2022, you will see that these currencies had a tough start. If you talk about bitcoin, the trends suggest that 2022 was a loss year. The loss was 40%. However, there were some other cryptocurrencies, like Binance Coin and Ethereum, that witnessed a loss of 48%.

The market capitalization highlights that these three are the biggest currencies in circulation.

There is a high possibility that this trend might come across as something new.

But, the reality is that this is not the first time that cryptocurrencies, or bitcoin, in particular, have seen such a dive.

Any investor interested in buying bitcoin should know that it differs from purchasing any traditional currency.

Pricing Of A Bitcoin

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Bitcoin is not issued by any agency, bank, or government. It is free from all these things. It means that any government that introduces monetary policy tools or other plans like the inflation rates and economic growth measurements do not apply to the functioning of bitcoin. The patterns that influence the value of bitcoin or other cryptocurrencies are others.

Bitcoin emerges as a commodity that is being used for storing value. Hence, its price is influenced because of the following factors:

  • The demand and supply patterns for bitcoin and its availability.
  • The transactional cost is followed by the cost of production that is put forward after the mining process.
  • The quantum of cryptocurrencies competing in the market, including bitcoin.
  • The availability of rules and regulations includes the sale of this cryptocurrency and its use.
  • The media and news trends can impact the demand and supply followed by the mining process.

Demand And Supply Patterns

Bitcoin is created at a specific rate. The rate at which it is created is subject to rejections every four years. The process of reducing is known as halving. In the process, the number of coins that are provided as a reward after successfully completing the mining process is cut into halves. The trend was last witnessed to be emerging in May 2020.

Interestingly, the demand for bitcoin is more from retail investors and institutional ones. The increasing demand is because bitcoin and its trading is improving because of media coverage and the experts tout the futuristic value of bitcoin.

There has been an increase in the demand for bitcoin, majorly in countries that are facing either of the two:

  • The countries are witnessing high inflation.
  • There has been a devaluation in the currency.

Also, bitcoin has emerged as a preferred choice amongst people using it to transfer large amounts of money for conducting illegal activities.

All these trends highlight that there can be shrinkage in the supply. Also, the shrinkage can be coupled with a surge in demand whenever there is a price fluctuation. In simple terms, price fluctuations can result in booms and busts. The periodic trends are a classical expedition of the same.

Reasons For The Bitcoin To Lose Its Value

The crashing prices of bitcoin can be a result of many factors. Some of them are discussed as follows:

1. Federal Reserve Policy Of The US

source:forbes.com

The market functions as the perfect source to understand the reasons for the decline in the value of bitcoin. In May 2022, the Federal Policy of the US was introduced, which came with the rise in the prevailing short-term interest rate. After the increase, the interest rate reached its highest value since 2000. It has been introduced to develop the country’s economy in the form of post-pandemic recovery. After this introduction, bitcoin witnessed itself falling into a short rally.

2. Sentiment

The market, the television, the discussions, debates, and ongoing news regarding trading and investment decisions impact the bitcoin value. It has chances of increasing and decreasing. Sometimes, there are concerns about whether the Federal Reserve would be able to manage the inflation rates and keep other risks of hitting a recession away or not. Also, the arrival of the pandemic has pushed the idea of a recession, and people worry whether a soft landing would be possible.

The opinions related to these trends include their take on the crypto market and its volatility. In simple terms, if you have been following Elon Musk, one of his tweets regarding the non-acceptance of bitcoin as a form of payment led to a drastic fall in the price of the currency in the international market. But other brands accept this form of payment. They have every reason to do so. You can read about them at coinguides.org.

3. Supply In The Market

It is obvious that a strained supply of the currency in the market will increase its demand and price. But, the vice versa can be true, too. If any currency enjoys more popularity, the prices and demand will increase. But, this brings another factor into the picture: investors have developed doubt about the security of transactions due to frequent trading leading to market collapse. Hence, it will hamper the demand and supply. In the end, the pricing of the currency in the market will also be affected.

Apart from these, the future contracts stipulated by bitcoin purchases are subject to liquidation in the long run. The fall in prices is the main reason behind the same. Hence, there is a lot of interconnectivity which either results in the increased prices or drastic falls. When these are studied periodically, patterns are formed.

Conclusion

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The decline in the bitcoin price can be because of numerous things, but one thing that draws them in a single thread is the concept of uncertainty. You don’t know that the currency can crash or go up. So, the investors can rely on trends and ideas followed by mass-selling or buying. But, you should have an edge, and you can do it by paying attention to what the investing trends were, are, and can be in the future. But it would help if you took some risk, too.