The fact that bitcoin was embraced by big, established investors last year has one downside: the price of the digital currency falls mercilessly if the big investors suddenly don’t like it anymore.
After a bad week, or indeed a bad start to the new year, the cryptocurrency price fell further below $35,000 on Saturday afternoon. Last November, one bitcoin was worth $69,000. Since that peak, the decline has started, and it has been particularly hard in recent days.
This price drop is currently quite similar to the stock market. Compare the price of bitcoin to the average price of the five hundred largest publicly traded companies in the US and you see almost exactly the same up and down movements.
Higher interest rates
So mostly down lately. One of the main stock market indicators in the United States, the aforementioned S&P 500, has fallen more than 8 percent since the start of the new year.
Many corporate stocks fall in value as investors expect further rising interest rates in America. The American umbrella organization of central banks, the Federal Reserve, has been mentally preparing investors for this for months.
As it stands now, the ‘Fed’ will raise its key interest rate for the first time in March, then implement a few more rate hikes later. Politicians are also openly toying with the idea of raising interest rates in other ways, for example by phasing out its corona emergency support even sooner than previously planned.
Eggs for their money
Higher interest rates deal a blow to risky investments, and bitcoin is one of them. Investors then pick eggs for their money, take it away from stocks and cryptocurrencies, and then put their money into safe government bonds. This pays off, the higher the interest rate on these government bonds.
As a result, the currency has lost much of the value it had built up last year in recent weeks. This value increased from around $10,000 in September 2020 to almost 70,000 more than a year later.
This was mainly due to the fact that large investment funds, for example those of some American insurance companies, put a small part of their invested assets in bitcoin. Due to the limited supply of the digital currency, this immediately drove the price up.
According to analysts at the investment bank JP Morgan, these large investors did this to hedge against high inflation. Bitcoin is sometimes seen as the new gold: there is only a limited supply of it, and this is how it protects against currency depreciation.
Paradoxically, it is precisely the high inflation of recent months that is the reason why the currency is not performing well. The high inflation is the reason why the central banks raise the interest rate and that higher interest rate cuts the price of bitcoin again.
Many supporters of the currency do not see it as an investment object, but as a future means of payment. They are less concerned about the exchange rate and believe that the current monetary system of the central banks will eventually come to an end. According to them, Bitcoin can then offer an alternative. Last fall, El Salvador, a small state in Central America, was the first to take the step to declare the cryptocurrency legal tender.
On the other hand, different governments are pulling the strings. Last Thursday, for example, the Russian central bank called for a complete ban on the use of bitcoin. Mining of the currency should also be banned, according to the Bank of Russia.
That would mean Russia would go after China, which already imposed such a ban last fall. It is still unclear whether Russia will actually go in that direction. Obviously, such announcements do nothing good for the price of the currency.
This is not the first time that the cryptocurrency has experienced severe declines. Last summer, the value briefly fell below 30,000 euros, after passing 60,000 euros in April. Then the coin quickly climbed back up.
Bitcoin’s value falls to over $41,000
Bitcoin’s value continued to fall on Friday. The main digital currency fell 3.7 percent to 41,635 dollars (36,847 euros). This is the lowest level since September.