Bitcoin price has crashed this week. After rising to an all-time high of almost $65,000 in April, BTC dropped to a low of $29,989 on Saturday. This means that the currency’s price fell by more than 53% from its all-time high. Its market capitalization dropped to more than $718 billion. So, let me answer some of the questions my readers have asked privately.
Why did the BTC price rise so much?
Bitcoin price surged by more than 1,465% from its lowest level in 2020 to April this year. This was a better performance than most assets like stocks and gold had during this period. There are two main reasons why BTC jumped by this much.
First, the Federal Reserve and the American government helped to create the current market conditions. In response to the coronavirus pandemic, the Fed brought interest rates to zero and launched a major quantitative easing (QE). Through QE, the bank is buying assets at a pace of $120 billion per month. As you can see, the balance sheet has moved from less than $4 trillion in 2019 to more than $7.922 trillion.
Fed balance sheet
With interest rates so low, and with the government unveiling large stimulus packages, more people had disposable cash. As a result, many pushed the funds to stocks, commodities, and cryptocurrencies. Indeed, most commodity prices surged, with iron ore reaching its all-time high last week. The Dow Jones, Nasdaq 100, and S&P 500 have also risen to an all-time high.
Second, as the Bitcoin price rose, it led to a period of irrational exuberance where everyone started to buy. This fear of missing out (FOMO) was intensified when companies like Tesla, Square, and MicroStrategy started embracing the currencies.
Why did altcoins also rise?
As the Bitcoin price rose, it led many retail traders to start considering other cryptocurrencies that are known as altcoins. These include coins like Ether, Binance coin, Ripple, and Cardano, among others. Investors simply invested in those coins hoping that they too will become as bigger as Bitcoin. Indeed, according to Coinmarketcap, there are now almost 10,000 coins.
Coins like Ether, Solana, and Binance Coin rose because of the popularity of financial products like Decentralized Finance (DeFi) and Non-Fungible Tokens (NFT). Indeed, at its peak, the DeFi industry had more than $90 billion in total value locked (TVL).
The sharp rise and the ongoing fall of altcoins show that there is a strong correlation between Bitcoin and altcoins. Altcoins have dropped more than Bitcoin because they are not supported by instititional investors. Instead, they are mostly bought by retail speculators.
Why BTC price is falling
There are several reasons why Bitcoin price is falling.
First, investors are generally worried about high inflation, which will lead to high-interest rates. The argument is that if Bitcoin prices rose during the Fed’s easing phase, it will clearly decline when it starts tightening. You can read about the relationship of Bitcoin prices and interest rates here.
Second, there are Environmental, Social, and Governance (ESG) concerns about Bitcoin. This is because Bitcoin uses a proof-of-work methodology that consumes a lot of electricity. Therefore, with most investors prioritizing ESG investments, there are concerns that many big investors like Vanguard and Blackrock will avoid investing in Bitcoin. In fact, carbon was the main reason when Elon Musk decided to cancel Bitcoin for Tesla transactions.
Third, there are concerns about more regulations in the cryptocurrency industry, especially after the recent Colonial pipeline hack. As you recall, during her confirmation hearings, Janet Yellen asked policymakers to help curtail the industry. These calls have grown louder after the hack. Meanwhile, China has unveiled plans to clamp down on the currencies. Other countries considering such actions are India and Turkey.
Finally, and most importantly, there is panic among many retail investors who bought as the price was rising. When bubbles burst, retail traders are usually the first to panic. This leads to a major sell-off as supply becomes more than demand. At the same time, there is an ongoing rotation from Bitcoin to gold. Indeed, gold is now trading at its highest level in three months.
Will Bitcoin prices rise again?
History suggests that Bitcoin prices will bounce back again. Furthermore, the fundamentals remain intact. For one, it is the best-known cryptocurrency in the world and has a finite supply. Also, Bitcoin has had worst collapses than the ongoing one. For example, in 2020, it declined by more than 60% at the onset of the pandemic.
In this article, I predicted that BTC would drop sharply as fears of high interest rates remained. This is simply how the market works. When investors are fearful about something, they tend to act irrationally and overreact. After the event happens, they overreact again and then start changing their mind. This is known as buying the rumour and selling the news or selling the fear and buying the news. A good example is what happened to Dogecoin prices after Elon Musk’s SNL appearance.
The implication of all this is that some altcoins, which I consider garbage, will go out of business. In this article, I outlined some of the alternative cryptocurrencies to buy if the industry recovers.
Which are the next key levels to watch
On the daily chart, we see that the Bitcoin price has already crossed the 50% Fibonacci retracement level. But, it has struggled to move below the 61.8% retracement level. Therefore, the next key level to watch will be this week’s low at $30,000. If it drops below that level, focus on the 61.8% retracement at $27,200. Any drop below that will bring $25,000 into view. On the other hand, a major jump above $45,000 will mean that there are still more sellers in the market.
Do you have other questions? Shoot them in the comment section below.