After breaking an all-time high last November, the most popular cryptocurrency has been plummeting since January 2022. What’s happening to bitcoin?
Winter is harsh for bitcoin. The most valued crypto-currency has seen its price drop by almost 50% since its November 2021 record. €653, according to CoinMarket Cap. Last year, bitcoin was really democratized. Platforms such as PayPal or Lydia have added this cryptocurrency to their offer, companies such as Tesla and SpaceX have invested in it and El Salvador has even decided to recognize bitcoin as legal tender (alongside the dollar).
Crypto mining soon banned in Russia?
The news, however, has generated a lot of uncertainty in the cryptocurrency market. On January 21, the Russian central bank took the sector by surprise by advocating a ban on crypto-currency mining, as well as investments and payments in these digital assets. The proposal will only come into force if the Russian parliament approves it. But this legitimately worries bitcoin traders, as Russia is the 3rd crypto mining area.
However, bitcoin has proven its ability to hold up in this type of scenario: when China banned crypto mining on its soil last June, the decision had a far greater scope: the country was then home to between 65 and 75 % of bitcoin mining. However, the system worked as expected: the difficulty of the equations that miners have to solve has been lowered to compensate for the drastic drop in mining machines. And if bitcoin took a nosedive at the time, it quickly returned to its former level.
The “cost of money” will increase
Russia is not the only unknown bitcoin enthusiasts have to deal with, however. The Central Bank of Canada is expected to announce this week (from January 24) an interest rate hike. Institutions such as these have the task of controlling inflation by keeping it at a balanced level. When inflation is low, central banks lower interest rates. Borrowing money then costs less, which promotes investment and less incentive to save. Conversely, when inflation is high, central banks may decide to raise interest rates. Borrowing money then starts to cost more. This shift then favors savings to the detriment of investment.
However, as we explained to you not long ago, the rise of crypto-currencies is strongly linked to the low interest rates since 2020. Central banks such as the FED in the United States or the ECB in Europe have in fact taken the decision to maintain them at a very reduced level in order to protect their economies, threatened by the health crisis.
Investors were therefore able to borrow money easily, and thus had more latitude to dare risky bets, such as volatile crypto-currencies. It was also in 2020 that bitcoin really took off: while it started the year around €6,400, it ended around €23,500.
Regulate crypto-currencies such as bitcoin
However, the policy of low interest rates is beginning to show its limits: inflation is rising in various countries, notably in the USA where it is reaching record highs (6.8%). Central banks will therefore correct this trend by raising interest rates very soon. The tightening of the screws of the FED, the American central bank, could begin as early as March. The United States has also planned to unveil new cryptocurrency regulatory measures in February.
We do not know, for the time being, what framework Washington will wish to pose to this sector. In any case, the US government has asked federal agencies to assess precisely what opportunities and what risks these new digital assets present. This framework is not necessarily going to hold back cryptos such as bitcoin. On the contrary, it could help to democratize them by giving them a more official and structured existence. But until these regulations are unveiled, this big unknown is generating uncertainty in the crypto market.
Note that this context does not only weigh on bitcoin, far from it. The price of Ether has also fallen significantly, as has that of Solana (respectively -50% and -67% since November 2021).