Bitcoin: the keys to understanding the fall in price

Are you interested in bitcoin and thinking about investing, but you don’t understand its price trajectory, what can cause it to rise or fall? There are no hard and fast rules, apart from the fact that the price of cryptocurrency varies according to supply and demand, just like any corporate action. But surely more than for other assets, the psychological dimension is important: “The more people who use bitcoin, the more people who know cryptocurrency and the more people who buy it”, explains Vincent Boy, a market analyst at brokerage IG.

According to this reasoning, the more the use of cryptocurrency should develop, the more the number of buyers should increase, mechanically raising its price. But the past few months have been rather chaotic for bitcoin, which has suffered from high volatility since its creation in 2009. The cryptocurrency has never been so well known to the general public and yet its price is falling. Since its historic high of 69,000 dollars, reached on November 12, it has lost around 45% of its value, as of January 31 at 7 p.m.

Cryptocurrency follows the stock exchanges

Rather than fluctuating in its own corner, bitcoin has followed the overall evolution of stock exchanges, and in particular of American tech stocks listed on the Nasdaq market. But with volatility that remains much higher and undergoing a much stronger correction. By comparison, the Nasdaq has fallen about 12% since mid-November. Like equity markets, bitcoin is affected by fears related to the evolution of central banks’ monetary policies.

Faced with high inflation, these institutions, and in particular the Federal Reserve (Fed) in the United States, plan to raise their rates and reduce their injections of liquidity into the economy, that is to say their debt buybacks. private and public. However, the markets have largely benefited from this money which flowed freely during the health crisis, until reaching peaks, the CAC 40 for example exceeding 7,000 points on November 5. And bitcoin was no exception. He also experienced a meteoric rise

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Difficult to play the role of safe haven

But cryptocurrency is now affected like other stocks on the stock market by monetary policies, which calls into question the theory that it could be used to hedge against inflation. Bitcoin cannot act as a store of value, it does not maintain its purchasing power over time. “For the moment, it is going in the same direction as the markets and it is too volatile”, emphasizes Vincent Boy.

It therefore seems difficult to compare it to gold as a safe haven, although the number of bitcoins issued will be limited to 21 million in total. The amount of cryptocurrency in circulation was fixed from its inception. A way to limit the money supply and make bitcoin a scarce asset, thus boosting its potential value.

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The technology behind bitcoin has less impact

If the correlation between bitcoin and the financial markets appears to have strengthened in recent months, the economic and technological fundamentals behind the cryptocurrency seem, on the contrary, to have less influence on its price. “Before, blockchain developments led to movements,” recalls Vincent Boy. Updates to this technology on which bitcoin is based, and which keeps transaction history, can improve the network, provide better security or greater speed.

They are supposed to encourage the level of adoption of cryptocurrency by individuals and professionals. But the pure technological dimension and the economic value that can be attributed to the blockchain are now taking a back seat. “The Ethereum blockchain is the most used for multiple applications, and yet the value of its cryptocurrency (ether, editor’s note) does not exceed bitcoin”, notes the IG analyst. Bitcoin is the subject of more speculation. Investors are betting on its future usefulness and value. “It is equated with a growth stock, and therefore bought at a high price for subsequent growth prospects”, believes Vincent Boy.

Companies and States can have a strong impact

However, cryptocurrency could see its value drop if states consider legislating against its use. Difficult to predict future regulations, but bitcoin is far from consensus. China notably imposed drastic measures last year which for a time caused the price of the asset to fall. Beijing has banned financial institutions from offering cryptocurrency-related services and banned mining from its territory.

The environmental impact of this activity, which consumes a lot of electricity and which makes it possible to validate bitcoin transactions on the blockchain, is often pointed out. This is one of the reasons that could lead States to impose restrictions. The other main reason is the desire to retain control over the currencies, while bitcoin has a decentralized operation on the blockchain and invites you to do without intermediaries, banks and states.

El Salvador has nevertheless decided to fully trust bitcoin and its president has consecrated it as the country’s official currency. If “bigger” states make the same choice, the price of cryptocurrency could take off.

Likewise, if digital giants like Amazon allow payment in bitcoin to purchase products, the use of digital currency could suddenly accelerate. When Paypal declared in the fall of 2020 that its online payment service would open its network to cryptocurrencies, bitcoin had begun a strong ascent. Prior to this announcement, its value was less than $13,000. It is now worth more than 38,900 dollars. But the evolution of its course remains impossible to anticipate.

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