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:

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.

Will bitcoin go up if the stock market crashes?

Not necessarily. Supporters of bitcoin see it as a diversifier in balanced portfolios, but it did no better than stocks at the start of the coronavirus pandemic. This is because investors panic-sold everything.

In the first two weeks of March 2020, bitcoin went down over 40%.

“That was when we saw all equity markets take an aggressive leg down because of concerns about Covid-19,” notes Rosie Bullard, partner and portfolio manager at James Hambro & Partners. “So it wasn’t exactly a store of value in an equity market reversal.”

Will bitcoin go back up?

There are no guarantees when it comes to investing. As quickly as bitcoin falls, it could just as rapidly climb again.

There are a number of concerns about cryptocurrencies that are dampening its prospects:

• Crackdowns in countries like China
• Calls for greater regulation across the globe
• Environmental concerns
• Security issues and hacks
• Their price is based solely on speculation
• Further regulation is seen as a threat to the decentralisation of crypto, which is having an impact on the prices of digital currencies.
• Bitcoin’s fans point to its positive qualities:

Transformative technology that could revolutionise industries

Simpler and cheaper transactions by cutting out “middle men” such as banks

Easier global trade because, with a non-fiat digital currency, there would be no concerns about exchange rates

Transactions are more confidential

It is a  safe store of value because it can’t be printed or seized

Bitcoin has been touted as an alternative to gold, meaning it could prove itself as a hedge against inflation

Given its volatile nature, it is possible that bitcoin will gather momentum again at some point in the future (perhaps weeks, months or even years down the line).

But no one has a crystal ball and the speculative nature of bitcoin makes it difficult to predict.

Find out more about the tips (and mistakes to avoid) when investing with cryptocurrencies.