The price of bitcoin dipped below $40,000 this week, as crypto market values plummeted in response to the Russian central bank’s intention to prohibit cryptocurrencies in the nation.
On Friday, January 21, Bitcoin was down more than 8%, as the month continues to see cryptocurrencies struggle to return to higher price benchmarks in 2022 amid global market anxiety about crypto hazards.
Why is Bitcoin crashing?
The fundamental cause of Bitcoin’s recent drop is widespread market anxiety, which has been fueled by the Federal Reserve’s economic tightening measures and the prospect of harsher regulation. The S&P 500 is on course to suffer its worst weekly performance since October 2020, and tech companies have taken a beating.
Bitcoin’s price soared to almost $70,000 in early November, as investors expected the cryptocurrency’s $1 trillion market cap to remain stable ahead of a volatile trading period.
However, in late 2021, it fell below $50,000 as US and UK markets grappled with increased concerns about the impact of Covid-19, the Omicron version, and excessive inflation.
Bitcoin’s price dropped in early January after a sharp sell-off on the Nasdaq index on Wednesday, January 5, as the US central bank appeared poised to shift away from its coronavirus pandemic monetary policies with interest rate hikes and potential securities cut to shrink its balance sheet.
Following the release of minutes from the US Federal Reserve’s most recent meeting in December – in which “expectations for a reduction in policy accommodation shifted forward notably,” the tech-heavy Nasdaq index lost 500 points.
Crypto mining companies in Kazakhstan, which have grown since China forbade cryptocurrency mining in the country, fell offline during a statewide internet outage, putting the cryptocurrency in jeopardy.
How is the global energy issue being exacerbated by the massive movement of bitcoin mining?
The price of bitcoin fell below $40,000 on Friday, January 21, after Russia’s central bank issued a consultation paper on Thursday titled Cryptocurrencies: Trends, Risks, and Regulation, warning that “the growth of cryptocurrency use poses a threat to Russian retail investors and financial stability.” and threats associated with the use of cryptocurrencies for illicit activities.
According to the report, bitcoin transactions among Russian individuals amount to up to $5 billion each year.
The paper focused in particular on the risks posed by cryptocurrency’s extreme volatility and instability for individual individuals, as well as its fraudulent and criminal applications.
The Russian central bank, on the other hand, compared the global expansion of cryptocurrencies in Russia to ‘dollarisation,’ claiming that ‘cryptoisation limits monetary policy sovereignty, which may require the central bank to maintain a higher key rate to restrain inflation on a permanent basis.’
It went on to say that “the spread of cryptocurrencies could cause people to withdraw their savings from the Russian financial sector, reducing its ability to finance the real sector and potential economic growth, reducing the number of jobs and household income growth potential.”
In a statement earlier this week, the UK government suggested a stricter approach to crypto-asset marketing and advertising.
Chancellor Rishi Sunak remarked as the government revealed intentions to introduce new regulations to combat deceptive cryptoasset promotion across the UK:
“Cryptoassets can open up exciting new possibilities for people, allowing them to transact and invest in new ways – but it’s critical that consumers aren’t sold products that make false claims.”
“We are ensuring consumer protection while also encouraging cryptoasset market innovation.”
Should you buy Bitcoin?
These kinds of market catastrophes can be extremely stressful. If you’re tempted to sell at a loss, remember why you got Bitcoin in the first place and focus on the long term. Panic selling is rarely a wise idea, as you will almost certainly lose money if you sell now.
On the other hand, “buy the dip.” is a popular rallying cry on social media. Here are two questions to ask yourself if you’re thinking about it.
1. Do you believe in Bitcoin’s long-term prospects?
It was simple for crypto investors last year to believe that prices could only go up. Despite the instability, prices continued to rise, and certain cryptocurrencies saw huge gains over the course of the year. (Bitcoin itself increased by 60%.) However, we are now in a different economic environment, and we may be in for a lengthy period of stagnation. Bitcoin’s value could plummet even further.
If you’re thinking about investing right now, consider where you think Bitcoin and cryptocurrencies will go in the next five to ten years. On the one hand, adoption is at an all-time high. El Salvador has already made bitcoin legal tender, and other countries may follow suit. Institutional investors are taking notice of cryptocurrency in a manner they haven’t previously, and many regard Bitcoin as a form of digital gold. Bitcoin is increasingly being accepted as a form of payment by merchants.
However, it is still a relatively new and unproven asset. Its growth could be greatly hampered by more regulation, and it is exceedingly volatile. Furthermore, Bitcoin mining is a disaster for the ecology. We don’t know what effect the launch of govcoins or central bank digital currencies will have, and many people believe Bitcoin’s value will plummet.
2. Do you have cash to spare?
Because Bitcoin is so unpredictable and speculative, you should only invest money you can afford to lose. Some consumers are enthralled by the prospect of purchasing Bitcoin while it is “on sale” and they spend money they don’t have right now. However, there are no promises that Bitcoin will rise again in the near future, so proceed with caution.
Before investing in a risky asset like Bitcoin, be sure you have a healthy emergency fund and adequate retirement funds. You don’t want to be broke in your later years because you lost money in a crypto crash. The cryptocurrency market has the potential to perform well, and blockchain technology has the potential to change the world. If it doesn’t, make sure it won’t jeopardize your long-term financial objectives.