Bitcoin has had a particularly volatile few months, with the cryptocurrency falling from an all-time high of US$64,804.72 in mid-April to US$42,600.15 by mid-May.
Here’s a quick summary of what influences the price of bitcoin.
What changes the price of bitcoin?
The technology surrounding bitcoin is unprecedented and unpredictable in many ways, but the basic tenets of supply and demand economics still hold some amount of sway over the new asset class.
Like most other tradeable commodities, the price of bitcoin primarily depends on the rate at which people buy and sell it. If more people are buying and holding bitcoin, the price goes up. If more people are selling, it goes down.
Why do people buy and sell bitcoin at certain times?
That’s a harder question to answer.
At a very basic level, crypto investors sell their bitcoin when they believe the value of their investment in bitcoin is outweighed by the value of liquidating it into cash.
Sometimes, this can happen because they believe that the risk of being devalued by the market is higher than the potential gains of holding onto their investment.
On the other hand, people looking to buy bitcoin almost always do so with the expectation that the price will go up and the value of their investment will increase. By moving fast, buyers look to maximise their gains in the same way that bitcoin sellers attempt to minimise their losses in response to bad news.
Why did the price of bitcoin fall this time?
Bitcoin investors have recently seen the value of their crypto assets hit by a number of setbacks. Over the last month, five discrete incidents have pummelled the price of bitcoin downwards.
Cumulatively, these events have undone several months of gains for the world’s most popular cryptocurrency.
On 18 April, the price of bitcoin slipped 15 per cent over a 24-hour period after rumours circulated on social media that the US Treasury was planning to investigate financial institutions for money laundering carried out using digital currencies like bitcoin.
On 23 April, the news broke that the Biden administration would look to raise the capital gains tax from 20 per cent to 39.6 per cent for households with over $1 million in income. The spectre of higher federal levies prompted a sell-off that pushed the price of bitcoin down below US$50,000 for the first time since March.
On 12 May, Tesla CEO Elon Musk announced that the car company would no longer be accepting purchases made using bitcoin.
“Tesla will not be selling any bitcoin, and we intend to use it for transactions as soon as mining transitions to more sustainable energy. We are also looking at other cryptocurrencies that use < 1 per cent of bitcoin’s energy/transaction,” Mr Musk said.
The announcement rattled the crypto market, causing the price of bitcoin to slip 5 per cent in its immediate aftermath.
On 17 May, Mr Musk again sent the price of bitcoin spiralling by replying to an unverified Twitter account that tweeted: “Bitcoiners are going to slap themselves next quarter when they find out Tesla dumped the rest of their #Bitcoin holdings. With the amount of hate @elonmusk is getting, I wouldn’t blame him…”
Mr Musk replied in a one-word tweet: “Indeed.”
This cryptic response quickly incited speculation that Tesla may have already liquidated its US$2 billion investment in bitcoin that the company disclosed to regulators earlier this year.
A day later, Musk came out and clarified that Tesla had not sold any of its bitcoin investment beyond the 10 per cent it liquidated in February. But, unfortunately, the damage had already been done, with a single word sending the price of bitcoin crashing to a low of $42,600.
On 18 May, the price of bitcoin tumbled for the third time in a single week after the China Internet Finance Association China Banking Association China Payment and Clearing Association announced a ban on activities involving cryptocurrency. These new guidelines bar Chinese financial institutions from conducting business related to cryptocurrencies, such as registration, trading, clearance and settlement services. Although it doesn’t outright ban the ownership of cryptocurrencies by individuals, a statement from the trio calls for consumers to “increase their risk awareness, establish correct investment concepts, refrain from participating in virtual currency trading hype activities, and beware of personal property and rights damage.”
Following the statement, major cryptocurrencies like bitcoin and ether both fell – with the former falling 5.3% to a low of $42,430 before rebounding.
Back in November 2020, a leaked report produced by a senior analyst at Citibank predicted that the price of bitcoin would peak in 2021 at a high of approximately US$318,000.
Is that outlook still likely? Not if Mr Musk has anything to say about it.
To find out more, or to review your current investments, get in touch with a Centra Money finance specialist for a confidential and obligation-free appointment at (08) 8211 7180 or info@centramoney.com.au
Article by Fergus Halliday on 19 May 2021 – nestegg.com.au