Today’s article focuses on the possible reasons for the Bitcoin exchange rate fall. Why is China trying to suppress Bitcoin? How does the “locomotive effect” work? Why major cryptocurrency exchanges are dropping due to the fall in the price of Bitcoin. Let’s get to know.
Bitcoin is heading into decline. Why is this happening?
After the dizzying rise of cryptocurrencies in late 2020 and early 2021, there has been a lot of speculation about the start of the inevitable “crypto winter”. The main question was: “Will the price of cryptocurrencies fall anytime soon?”
There were many assumptions about the reasons for the fall or freeze of the price: the tightening of crypto regulation in different countries and very sporty opinions about the complete ban of cryptocurrencies as financial assets. And not only.
How did it all happen?
The big sale began on May 19 to ban financial institutions in China from trading cryptocurrencies. On the same day, the Bitcoin price was dropped.
The China Ordinance 2021 applies in a broad context. It bans financial institutions from accepting payments in cryptocurrency or using them for payment or settlements of any kind. Among the bans are also any exchange services between cryptocurrencies and fiat currencies, including the Chinese yuan. Banks now have to track money related to cryptocurrency trading.
The situation instantly became a red indicator for crypto traders as China is one of the world’s largest cryptocurrency mining markets.
However, the decline in the value of cryptocurrencies means the increase of the downtrend, but not the complete fall of the crypto markets. Let’s look at the situation more broadly. It turns out that Bitcoin, considering the recent fall, has grown by 16% in 2021 and the same cryptocurrency has doubled in price over the past 12 months. Ethereum’s growth was + 175% in 2021, and Dogecoin was + 5.800%.
China is trying to crush Bitcoin’s influence. Why?
The reason is that bitcoin and other cryptocurrencies are not regulated by central banks. This determines the value of such assets to investors. The lack of centralized regulation and the growing adoption of crypto assets worries many governments, including Beijing.
There are other reasons for the attacks by the Chinese authorities:
· Confidentiality. Bitcoin guarantees privacy to users, and this is an important factor of libertarians’ support. The high level of confidentiality stimulates the antipathy of the authorities at the same time. Beijing is an example of such a process. The Chinese government does not like the idea of the free circulation of finance by citizens without official supervision.
· Environmental factor. About 65% of bitcoin mining takes place in China using large amounts of electricity from coal-fired power plants. Thus, cryptocurrency makes it difficult to decarbonize China.
· Threat to GDP growth. China has significantly expanded its domestic economy in the past few decades. Much of the success has been in the distribution of money after the 2008 crisis, from ordinary savers in state-owned banks to state-owned companies with high investments in the form of ultra-cheap loans.
Beijing fears that cryptocurrencies will rob national state-owned banks of deposits. The state may lose the ability to stimulate GDP growth through cheap loans to businesses in this case.
China’s victory over bitcoin depends on how many users value the privacy factor of cryptocurrencies. Massive support from ordinary people will make it attractive and contribute to a new strengthening of the price.
The locomotive effect: why are key cryptocurrency exchanges losing money due to the Bitcoin price falls?
Problems with Bitcoin are leading to a general escalation in cryptocurrencies in general, as it is the dominant digital asset. BTS is a broad sentiment indicator. What influences the value of Bitcoin?
· Bad news. News events include geopolitical events and government statements about regulation or stricter regulation of Bitcoin or cryptocurrencies in general.
· The perceived value of Bitcoin. The most popular cryptocurrency has properties comparable to the value of gold. One of the reasons for Bitcoin’s fluctuations to fiat currency is its perception as a store of value. We remind you that Bitcoin production is limited to 21 million BTC.
· Uncertainty in the future price. The instability of Bitcoin and other popular cryptocurrencies does not allow them to be a transparent store of value, but a smooth transfer of value is guaranteed.
Is China the only reason for the Bitcoin crash?
No, it isn’t. China’s ordinance has no global relevance as it is comparable to the 2017 Chinese ordinance. However, many experts say that such a correction in the market was expected.
Small retail investors are now leaving the market because they are intimidated by the totality of events. These include recent comments from Elon Musk, growing environmental concerns around mining, China’s actions, and more. However, it is worth remembering 2016–2018 when cryptocurrency prices fell similarly. Then the geopolitical field was also turbulent due to the aforementioned decision of China, the elections in the United States, the first global statements by governments about the need to regulate cryptocurrencies, etc. Now and in the recent past, young retail investors have sold off assets and left the market. However, more experienced people bided their time and bought cryptocurrencies at a reduced price for the long term.
And yet, is Bitcoin collapsing? Not really. The situation should not be considered a “fall”. Still, Bitcoin has been characterized by expressive volatility for many years.
Bitcoin’s current downturn is not related to a specific event or news. China’s announcement of increased control and bearish tweets from Elon Musk matter, of course. As a reminder, the founder of Tesla and SpaceX refused to use bitcoins to pay from Tesla, an electric vehicle manufacturer, until the cryptocurrency becomes more environmentally friendly.
In general, Musk was one of the key reasons why the cryptocurrency rose earlier, as his tweets about the Dogecoin and Bitcoin supported the upward trend. And also, analysts at JPMorgan Chase & Co. JPM, including Nikolaos Panigirtzoglu, argue that Bitcoin investors are increasingly switching to gold futures, which coincidentally has been showing steady growth in recent times.
In any case, the cryptocurrency market will still be volatile for some time, as it is still emerging compared to other asset classes. We see the ripening phase when scaling, ups, and downs occur.