Bitcoin is the world’s first digital currency and it has been very popular over the last years! A lot of people have made large profits by buying BTC for a low price and then selling it for a high price. Bitcoin has been one of the best investments you could have made in the last 5 years. But why is Bitcoin dropping? I am sure you already heard about the recent BTC price fall that followed the theft of more than $30 million worth of digital tokens from a cryptocurrency exchange. So, unsurprisingly, the BTC value has now fallen again.
If you would like to learn more about Bitcoin as one of the biggest cryptocurrencies ever, check our detailed article. Otherwise, keep reading to find out why BTC is falling.
Why is Bitcoin Valuable?
Bitcoin is a different kind of beast that can be difficult for people to understand. New things usually are. And while first cryptocurrency is nearly nine years old, it represents a completely new type of asset. It offers an efficient means of transferring money over the internet and is controlled by a decentralized network with a transparent set of rules, thus presenting an alternative to central bank controlled fiat money. There has been a lot of talk about how to price Bitcoin.
Fundamentally, Bitcoins derive their value just as anything else does: because people want them. Like any other currency, BTC follows the basic rules of supply and demand. Currencies have always been useful tools to make trade easier, enabling holders to convert goods into a widely tradable commodity through sale, then use the proceeds of that sale to purchase nearly anything they wish.
While fiat currencies derive value from the governments that back them, currencies like gold are valuable by themselves. Currently, BTC isn’t like other currencies in that it is not universally accepted. There are limits on what it can be used for. While not backed by any government or valuable by themselves, digital coins are still used as a store of value, a placeholder for goods and services that can be exchanged, as with traditional currencies.
Bitcoin derives its unique value from the fact that despite its lack of official backing or wide acceptance, it has generated an ecosystem in which many people are willing to trade and accept it. In fact, some perceive Bitcoin to be more valuable, or more useful, than other currencies in that it is a better option for certain purposes, such as seamless digital transfers and use across borders. Also, because there is a cap set on the total number of coins that will ever exist, the currency cannot be devalued through inflation as others can.
Another benefit of Bitcoin is known as “censorship resistance”. This refers to its ability to be used for transactions that could normally be censored by other payment networks. Using the most powerful computer in the world, it would take .065 billion billion years to crack a person’s private key. And it is all due to cryptography that defends cryptocurrency users from even governments and large companies.
The Bitcoin network is the most powerful computer in the world because it pays so-called “miners” in BTC to lend computing power towards securing the network. As the price of BTC increases relative to fiat currencies, miners receive higher fees, incenting them to devote yet more computer power, which makes the network more powerful and creates a positive feedback loop.
Because the vast majority of Bitcoin users believe the network is only valuable if it remains decentralized, a 51% attack would likely mean that as soon as an attacker gained control of 51% of the network, it’s value would drop to zero.
More significantly, if you had 51% of the hashpower, you could stand to make ~$15–20M per day mining honestly. So, even if you have dishonest ambitions, it’s more profitable to just play by the rules.
This combination of the defender’s advantage and the positive feedback loop in mining creates a property called censorship resistance.
In other words, anyone who wants to steal your cryptocurrency from your wallet by cracking your private key or to perform a 51% attack would have to bring such an enormous amount of computing power to bear that it would cost far more to steal the BTC than to simply buy it.
Censorship-resistant wealth storage in general, and Bitcoin specifically, may sound like a strange libertarian or anarchist perspective if you’ve grown up in a stable country. But with all of the crazy things going on in the world, the demand for censorship-resistant wealth storage is high and growing. Current markets which exist largely because of their censorship resistant properties include the gold market (est. $6 trillion) and the offshore banking industry (est. $20 trillion).
While payments are the first thing that people think of for Bitcoin, the reason that most people buy today is its utility as “digital gold”.
People are attracted to an asset that is provably scarce, nearly impossible to seize or censor, and part of a decentralized and permission-less network that anyone can participate in.
As a venture firm dedicated to the blockchain and crypto ecosystem, we’re constantly collecting data points from around the world. But one of my favorite anecdotes is a doctor in Brazil who has converted his medical practice one day a week into a “Bitcoin consultancy,” where all he does is help doctors and other people get set up with Bitcoin.
The main reason they want to buy? They’re terrified of wealth confiscation in light of a burgeoning public deficit. To be clear, they’re not rushing to put all of their assets into Bitcoin, but it’s a piece of a defensive strategy for some Brazilians to retain their hard-earned wealth.
What Determines the Price of Bitcoin?
The price of BTC is not the same as its value. Price is determined by the market in which it trades: by means of supply and demand. This is the same way the price of your secondhand car, a bag of apples in the supermarket, an ounce of gold and just about everything else is determined.
Just like most currencies, the cryptocurrency price changes every day. The only difference is that the price of BTC changes on a much greater scale than local currencies. It is the ongoing interaction between buyers and sellers trading with each other that determines the specific price of BTC (and everything else).
Bitcoin’s value is based on how valuable the market (the people buying and selling BTC) thinks it is. Think about some of the more physical things you can currently invest in, such as Gold. The price of Gold depends on its supply and demand. For example, when a new Goldmine is discovered, the price drops. This is because more Gold becomes available and so it is no longer as rare. So the rarer Bitcoin is, the higher BTC price predictions are.
So when determining a price, we must also consider the amount that buyers are currently willing to pay for the future value of a specific item. In other words, if the market believes the price of something – like property, a certain stock, or BTC – will increase in the future, they are more likely to pay more for it now.
The example of Gold is similar to how Bitcoin’s price changes. However, the price of cryptocurrency usually changes because of the news that is published about it. Here’s how it works:
- When there is bad news published about Bitcoin, there are a lot more people selling than buying BTC. These people sell their cryptocurrency for lower prices than the current value so that they can sell it quickly. This causes the price to drop.
- When there is good news about crypto, there are more people buying BTC than there are people selling it. These people buy cryptocurrency for higher prices than the current values so that they can buy it quickly. This causes the price to rise.
When Bitcoin was created by Satoshi Nakamoto, he set a limit for how many coins can be made — 21 million. This means that for as long as Bitcoin exists, there can only ever be 21 million — no more. So, if the popularity of BTC increases, so should the value.
Why Does the Price Change so Often?
This is called volatility, and it’s not only the BTC exchange rate that seems to change from day to day. The price of many things, such as stocks, currencies, oil and many other products can be quite volatile: moving up and down a lot against a base currency (such as the US dollar).
The total cryptocurrency market is still relatively small when compared to other industries. It doesn’t take significant amounts of money to move the market price up or down, thus, the price of a BTC is still somewhat volatile.
The price is up one day, down the next day… it has a history of being difficult to predict in the short term. Yet, a lot of investors like this. With prices that fluctuate regularly, investors can often buy BTC at a low price and then sell it at a much higher price.
There are other investors, though, that buy cryptocurrency to hold it for the long term — this is how a lot of people got rich! Some investors bought BTC over 5 years ago for super low prices (under $100) and held it until last year when it reached $10,000-20,000!
Why Is Bitcoin Falling?
Why is Bitcoin going down? Well, as mentioned earlier, the BTC price is always up and down and there are several reasons for that. However, a price crash in BTC or any other cryptocurrency is nothing new. “Digital gold” dies and comes back to life on a regular basis.
A whole slew of bad news has led to a huge downturn in the crypto economy. The market was shaken a few days ago as news emerged that more than $20 million in BTC was seized from illegal vendors on the Darknet by the Department of Justice (DOJ). Agents claim to have seized cryptocurrency mining devices, weapons, narcotics, $3.6 million in US currency and more than 2,000 BTC worth more than $20 million.
Another reason for the BTC price changes may also have been the most recent comments from Alibaba’s chairman Jack Ma advising traders to avoid trading in BTC. Speaking at a launch event for a new online-payment service for real-time cash transfers between Hong Kong and the Philippines, he said: “Technology itself isn’t the bubble, but Bitcoin likely is.”
Alongside this, the head of payments policy at Australia’s Reserve Bank – the equivalent of the Federal Reserve or the Bank of England – said cryptocurrencies’ strengths are also their weakness. In a speech delivered to Australian Business Economists, Tony Richards from the bank condemned Bitcoin’s transaction output, comparing the cryptocurrencies 4.5 transactions per second rate to Visa’s 65,000 transactions per second.
Even more, hackers managed to steal 35 billion won ($31.5 million) from South Korean exchange Bithumb this week, Reuters reports. The company has reacted by moving all of its users’ assets to “cold storage”, and placing a temporary block on all withdrawals and deposits. It isn’t yet clear who was behind the heist, but Bithumb assured affected customers that they would be refunded.
Long-term Factors Causing Bitcoin’s Price to Decrease?
Although many blame this crash on recent news, there have been several longer-term trends that you should be aware of:
- Bitcoin’s monthly trading volume has been decreasing for the past 4 months (on specific days it’s had large spikes, but using the monthly totals it’s been decreasing). Many consider low trading volume to be an indicator that price will also decrease.
- Interest in cryptocurrency on Google Trends has been decreasing since early February 2018 (this is likely a contributor to the decreasing trading volume). Is there a relationship between interest in Bitcoin & its fiat price?
- Very speculative: There have been several posts suggesting that Bitcoin follows an up or down trend between the 6th of each month, with many claiming that June 6th, 2018 was the point when BTC may begin going up in value again. Others have posted that because Bitcoin has started going down now, after June 6th, it will continue to go down until July 6th,2018, and may then either start going up again or continue downwards.
Let’s highlight the biggest Bitcoin drops through its history:
- In 2011, the price crashed 93% in five months.
- In 2012, the price crashed 57%
- In 2013, the price dropped 87% and lasted 411 days, ending in January of 2015.
- In 2017, the price crashed 59%
Some experts predict Bitcoin could continue to fall, with many suggesting the biggest cryptocurrency on the market could have found a new bottom. Previously, the bottom was thought to be at $6,100, but BTC dropped to $5,800 over the weekend, suggesting a new bottom could be about to hit the digital currency.
2018 hasn’t been a particularly good year for crypto holders. And the truth is no one really knows how long it’s going to last. If more countries create regulations/laws for cryptocurrency, more bad news will be published. This means we may see cryptocurrency crashing again. Countries such as South Korea, Japan, China, France and the United States all want to create new regulations.