The Price of Bitcoin Is Plunging - Does That Mean Investors Are Losing Confidence?
Or is it a buying opportunity?
I’ve owned Bitcoin for long enough to have seen a few booms and busts.
I’m largely desensitized to seeing the price drop by 10% or more within days or weeks, accepting that it’s done it before and will likely do it again too.
Conversely, when the price has marched upwards, I’ve grown accustomed to not getting too carried away either. Bitcoin is known for its volatility and radical increases and drops in value are part of owning the best-known cryptocurrency.
In recent months though, many appear to have lost sight of this reality. Even my faith has been tested lately.
With Donald Trump winning a second term in the White House, optimism and a (perhaps naive) belief in his campaign promises to act as the ‘Crypto President’ saw the price pump above $100k for the first time ever. In the moments before his swearing-in ceremony it nudged $110k.
In the weeks since, we appear to have become impatient and the price had clung on above $90k until earlier this week when it went into relative free-fall. At the time of writing it’s recovered a little from a low of around $83k.
So what the heck happened?
The macroeconomic factors
One of the primary drivers behind Bitcoin’s recent price drop is the broader macroeconomic environment. One of the signs of maturity in Bitcoin is in it becoming more closely correlated to other conventional investment instruments and susceptible to wider economic factors.
The global economy has been grappling with several challenges, including rising inflation, increased interest rates, and fears of a potential recession. These factors have affected us all, and have led many investors to seek safer assets, such as U.S. Treasurys and gold, rather than riskier investments like cryptocurrencies.
While prospects of a more favorable regulatory regime in relation to crypto remain likely under Trump, the U.S. Federal Reserve and the European Central Bank have implemented tighter monetary policies, reducing liquidity in the market as a whole. Higher borrowing costs have further driven investors away from speculative assets like Bitcoin. The combination of these macroeconomic pressures has created a challenging environment for Bitcoin and other cryptocurrencies.
The Trump factor
Political developments have also played a significant role in Bitcoin’s recent price decline. The re-election of Trumpand the Republican Party’s control of both the House and Senate initially sparked optimism in the crypto community, but the lack of concrete regulatory actions and ongoing political chaos have dampened investor sentiment.
The committee tasked by Trump to consider the creation of a Strategic Reserve of crypto has begun its work, but the sentiment amongst many inside the industry is indicative of impatience and unrealistic expectations over how much might have happened and how quickly into Trump’s second term.
Trade tensions and new tariffs imposed by the U.S. administration have further unsettled global markets, leading to risk-off sentiments among investors. The announcement of tariffs on imports from Canada and Mexico has added to the uncertainty, causing investors to reassess their portfolios and move away from high-risk assets like Bitcoin.
Fear, Uncertainty and Doubt — AKA ‘FUD’
The notion of FUD is longstanding in the world of crypto. The stereotypical (lazy?) responses from those who doubt the merit of crypto is to resort to cliches; that it’s a tool for criminality, susceptible to loss or theft or environmentally unfriendly. While these issues aren’t unique to Bitcoin (criminals use cash too, right?!), these sources of FUD seem always to rear their heads at the most inopportune moments.
One of the most significant recent events, contributing to Bitcoin’s recent drop in price has been the hacking of the Bybit cryptocurrency exchange, resulting in the theft of approximately $1.5 billion in virtual assets. This security breach has raised concerns about the safety of digital asset platforms and contributed to market apprehension.
Moreover, the upcoming $5 billion Bitcoin options expiry has led to increased market volatility. The max pain level for options is around $98,000, suggesting that investors may attempt to keep Bitcoin’s price within a specific range. However, the extreme fear in the market and recent liquidations have made it difficult for bulls to regain control.
The broader cryptocurrency market has also been affected by significant outflows from Bitcoin and Ethereum ETFs. Over the past two weeks, U.S. spot Bitcoin ETFs have seen net outflows of $1.14 billion, the largest since their launch. This has added to the selling pressure and contributed to the overall decline in Bitcoin’s price.
What next
There are numerous factors at play which are affecting Bitcoin’s price right now. There will be other things that happen too, which drive the price upwards and downwards over the coming days and years.
The price will continue to go up and down, regularly and radically.
For my part, I’m familiar with this and have weathered past booms and busts. The busts offered opportunities to buy more BTC at a lower price. The booms have represented a time to take profits and reap the reward of riding it out.
This time is no different. I’m not investing more in Bitcoin than I could afford to lose if the price went to zero. I don’t want it to of course, but I recognise it as a possibility (if not a likelihood).
Like all investment assets, the price goes up and down. The best approach in my view is to invest regularly, in a balanced portfolio rather than putting all my eggs in one basket. Then set and (largely) forget.
That’s what I’m doing. What will you do?
Note: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.