Bitcoin crash-what’s behind crypto collapse?

 Cryptocurrency is volatile, with a track record of “boom and bust“ cycles that have left many wondering whether it’s safe to invest.

What is happening to the value of bitcoin and why? 

Bitcoin is incredibly volatile, rising and falling sharply on a daily basis. But it’s not the only cryptocurrency to have had a tumultuous time recently.

Global stocks have gone into a downturn as result of:

• The war in Ukraine
• Inflationary fears
• Higher interest rates, which will make it more expensive for businesses to borrow money

This has spilled over into the cryptocurrency market.

The slump in June 2022 was triggered by Celsius Network, a major US cryptocurrency lending company, after it froze withdrawals and transfers, citing “extreme” conditions.

The move fuelled a slump across cryptocurrencies, with their value falling below $1trillion for the first time since January last year.

Bitcoin slid to $23,476 after the announcement. Ether, the second largest token after bitcoin, tumbled by as much as 16% to $1,177, its lowest since January 2021.

China’s continued crackdown on crypto is playing a part too. And there has also been speculation that crypto operations could come to a halt in Russia.

In addition to this, there have been sudden and severe sell-offs of major cryptocurrencies. This has triggered panic and further sell-offs as consumer confidence is knocked.

Why is bitcoin so volatile?

Unlike traditional investments such as company shares, where price movements may well be influenced by the performance of the business, bitcoin has no underlying asset.

This means that the movements in its price are based purely on speculation among investors about whether it will rise or fall in future.

As a result, there can be violent swings in the price of bitcoin, even in the space of 24 hours.

There have been a number of incidents that have caused the price to fluctuate:

Negative stories

A number of negative stories and threats of further regulation have pushed the price of bitcoin down.

These include:

• In June 2022, Celsius Network, a major US cryptocurrency lending company, froze withdrawals and transfers, citing “extreme” conditions.
• Also in June 2022, Binance, one of the world’s largest cryptocurrency exchanges, paused bitcoin withdrawals, with chief executive Changpeng Zhao blaming a “stuck transaction” that was causing a backlog.
• Early in 2022, it was reported that Russia might ban cryptocurrency operations. But then, after the invasion of Ukraine, there were calls for crypto exchanges to ban Russian transactions.
• In May 2021, Tesla boss Elon Musk said that the electric car maker would no longer be accepting digital payments over concerns about the impact of cryptocurrency “mining” – the computing power required to create the likes of bitcoin – on the environment.
• In June 2021, banks and payment institutions in China were told to stop enabling crypto transactions, and the Chinese government banned the mining of the currencies. Then in September 2021, all crypto transactions were declared illegal, in effect meaning that the likes of bitcoin were banned.
• Also in June 2021, then US president Donald Trump described bitcoin as a “scam” competing against the dollar to be “the currency of the world”.
• FBI agents have seized millions of dollars in bitcoin from criminals down the years.
• In August 2021, UK regulator the Financial Conduct Authority in effect blacklisted Binance, one of the largest crypto exchanges. Big banks such as HSBC and Santander followed suit by blocking customers from making payments to Binance.
• In the same month, the International Monetary Fund issued a warning on countries using cryptocurrencies as legal tender, saying its widespread use would threaten “macroeconomic stability” and could harm financial integrity.
• Crypto heist: last August, a hacker stole $600m in a cyber attack targeting the crypto platform Poly Network, only to return more than half of it four days later saying they did it “for fun” and to “expose the vulnerability” in the system before others did.

Positive stories

But there have been more positive stories, and these have given the bitcoin price some protection over the past year:

• In March 2021, Morgan Stanley became the first big US bank to offer wealthier clients access to bitcoin funds – albeit restricted to no more than 2.5% of an investor’s total net worth.
• In June 2021, a month after sparking a crypto sell-off, Elon Musk said Tesla would probably accept bitcoin payments again when more than 50% of its energy usage came from renewable sources.
• Amazon posted a job advert for a “digital currency and blockchain product lead” in July 2021, prompting speculation that it would soon accept bitcoin as payment.
• Last September, El Salvador made bitcoin legal tender.

Other stories have been more mixed in terms of what they mean for cryptocurrencies. Among them has been the US Federal Reserve considering whether to launch its own “central bank digital currency” (CBDC).

In March this year, President Joe Biden issued an executive order that aims to co-ordinate the US government’s actions on the regulation of digital assets.

While many crypto fans think regulation is a bad thing, some think this new executive order could help with the development of digital assets, such as the CBDC, to ensure the right consumer protections are in place.

Has bitcoin’s bubble burst?

It certainly seems like bitcoin’s bubble has burst as investors have lost confidence in the crypto sector, causing prices to crash:

• In 2021 the price soared by more than 700% in 12 months to a record high of $69,000 in November
• Fast forward to June 2022 when it plummeted below $18,000

When assets rise very quickly in price and surge to a record high, typically this makes a crash much more likely – or at least a correction, which is when the price falls back down to a more “normal” level.