Financial News

Why has the price of Bitcoin fallen?

The price of some cryptocurrencies skyrocketed during the pandemic, so what caused the Bitcoin market to lose more than $70 billion?

Why has the price of Bitcoin fallen?
Dado Ruvic REUTERS

Cryptocurrencies are digital assets that can be used to exchange goods and services just like other forms of physical currency. Ownership of cryptos is usually kept in a public electronic ledger that helps to create transparency in the market.

One of the most notable cryptocurrencies is Bitcoin. Bitcoin was released in 2009 and in April of this year, Bitcoin broke records with one unit being worth around $64,000. For comparison, when the coin was first released in 2009, one unit sold for around $300. As of March 2021, there are around 18.6 million Bitcoins in the market.

The pandemic has been a game-changing event for the cryptocurrency market. With so many people at home, many have decided to get involved. Additionally, the isolation people experienced opened up minds to how digital currencies could be used in the future as the physical exchange of money slowed dramatically.

Why did the price of Bitcoin fall so suddenly?

Many economists and technology experts believe that cryptocurrencies are the future. However, their price is still heavily affected by how governments and major financial institutions respond and interact with them in the market. Since it reached its peak in early April, the price of Bitcoin has fallen nearly 10%. This decline comes after two major stories shook investors. The first was the announcement by the China Banking Association which released a statement saying that there is a serious risk in the trading of digital currencies. In a twenty-four-hour period, the value of the Bitcoin market dropped more than 70 billion dollars. While this may seem catastrophic, the price of Bitcoin stands at around $40,000, and last year at this time it was about a quarter of that.

In addition to the comments made by the China Banking Association, Elon Musk, the billionaire CEO of Tesla and Space X has recently made moves that have impacted the price of Bitcoin -- both for better and for some investors, worse.

FILE PHOTO: Representations of virtual currency Bitcoin are seen in front of Tesla logo in this illustrationFILE PHOTO: Representations of virtual currency Bitcoin are seen in front of Tesla logo in this illustration taken, February 9, 2021. REUTERS/Dado Ruvic/File Photo/File Photo

In February of this year, Musk released a statement that Tesla would begin to accept Bitcoin as a form of payment and that the company was set to purchase nearly 1.5 billion dollars worth of the crypto. However, more recently, Musk has criticized Bitcoin and raised concerns over its environmental footprint, and backtracked on his decision to accept Bitcoin.

Environmental arguments

CoinDesk, an online news site focused on digital currencies found that if Bitcoin was ranked as a country when it comes to energy consumption, it would be the 29th largest consumer in the world. Bitcoin proponents argue that this is an unfair comparison because the energy footprint is not consolidated in one place and that in most cases, the energy used to create, trade, and store Bitcoin does not take up more than 1.2% of a countries total energy use. Additionally, these arguments are often used by those who have a vested interest in seeing these new frontiers of currency fail. No one seems interested in talking about the energy needed to sustain our current financial system which in many ways also relies on a global data infrastructure.

Bitcoin and market fluctuation

When Elon Musk tweeted out that Tesla would not be accepting Bitcoin as payment, many took that to believe that the company was selling off some of the nearly $1.5 billion it had acquired earlier this year. This sent the market into a frenzy with many people fearing a sudden price drop and thus began selling off their coins. A few hours after the price had begun to plummet, Musk clarified that Tesla would be holding onto the Bitcoin that they had purchased which for the time being helped to stabilize the market. 

However, this series of tweets shows how susceptible the currency is to price fluctuation and how investor herd mentality can hinder the currency’s success. The value of currencies like the US Dollar or the Euro is based on monetary policy and the decisions of institutions to increase the value or depreciate its value to align with the needs of the government, economy, and people. The value of cryptocurrency is fully reliant on those who believe in it. If there is a sudden reason to lose trust or faith in the coin, it is possible that it will fail, which Bitcoin even acknowledges as a risk. In the Bitcoin market, investors are constantly bombarded with information that could impact the value of the coin and their decisions to create (mine), buy, or sell then impact the price.