Why Is the Price of Crypto Falling?

Wednesday saw Bitcoin prices fall close to 30 percent after China warned members of the CBA of the potential risks of digital currencies. It was not just Bitcoin prices that felt the impact, other digital currencies also saw sharp declines.

April 13 saw Bitcoin hit a price above $64,600 per coin. Since then, the cryptocurrency has shed about 40 percent of its previous high value. Wednesday saw it slowly recover in early afternoon trading.

Major factors in the dramatic decline include the decision made by Tesla Motor not to accept digital currency for the purchase of their vehicles, as well as concerns focused on tightening regulations that affect all digital currencies. Although the price is falling, it is still up over 30 percent this year and 300 percent from a year ago.

Why Did the Price Drop?

It appears to have started when the CBA (Chinese Banking Association) noted on its website that financial institutions should “resolutely refrain” from offering or providing services that included digital currencies due to the inherent volatility of such currency.

Shortly after the statement was made, virtually every cryptocurrency fell. Bitcoin fell to a low of $30,202. It recovered later to $38, 038 but that represented a drop of 12 percent on the day. Most cryptos lost anywhere between seven percent and 22 percent of their value. Shares of Coinbase were also impacted, dropping 5.4 percent.

Bitcoin has proven to be an unpredictable asset. The price can change by thousands of dollars very quickly. Bitcoin closed at slightly under $30,000 on the last trading day of 2020. By mid-April 2021, the price was approaching $65,000. Since April, the price of Bitcoin has bounced around, before taking a somewhat dramatic negative turn last week.

How Does Bitcoin Work?

Bitcoin is a digital currency. Unlike Fiat money, Bitcoin is not tied to a government or a bank. Bitcoin provides users with the benefit of spending money anonymously. Bitcoin is created by miners, they can also be bought and sold on exchanges using Dollars, Yen, Euro, or one of several fiat currencies.

Although mainstream adoption of Bitcoin is limited, some financial institutions do accept it for inclusion in a client’s portfolio and some businesses accept it as payment for goods and services.

Bitcoin is little more than computer code. Each time the code travels from one owner to another, the code is digitally signed. Cryptocurrency such as Bitcoin is popular with speculators as well as criminals as all transactions are made anonymously.

Bitcoin is stored in a digital wallet. The wallet can be online through an exchange, or offline on a hard drive that uses specialized software. It is believed that only 21 million Bitcoin exist and of this number, almost 19 million are in circulation.

What Role Does Elon Musk Play?

Elon Musk announced in February that Tesla had invested $1.5 billion in Bitcoin. The following month, Tesla began accepting Bitcoin as payment for their vehicles. It is felt that the actions of Musk directly contributed to the rapid run-up in the price of Bitcoin. Musk also was instrumental in promoting Dogecoin which also went up in value.

Musk’s reasoning was not accepted by everyone. Mark Cuban, also a billionaire, noted that gold mining is far more damaging to the environment than is the mining of Bitcoin.

There is Skepticism Surrounding Bitcoin

Attempting to figure out the value of Bitcoin is not as easy as tracking its price. This is one of the primary reasons why experts, institutions, and traders alike are skeptical about it. Digital currencies were initially seen as a natural replacement for physical notes and coins, but so far, nothing has happened.

Jerome Powell, Chairman of the Federal Reserve says the central bank would prefer to call crypto coins, crypto assets. His feeling is that their volatility undermines their ability to act as a store of value, an asset that is one of a currency’s basic functions.