Bitcoin price has been on a downward spiral for the past month, reaching a low of $27,600 on Jan. 27, 2023. This is the lowest level since Dec. 29, 2021, when the cryptocurrency briefly dipped below $28K before recovering. The current slump represents a 56% drop from the all-time high of $68,789 reached on Nov. 10, 2022.
What’s Causing the Bitcoin Price Crash?
There are several factors that have contributed to the bearish sentiment in the crypto market, including:
Regulatory uncertainty
The U.S. government is reportedly preparing a strategy to address the economic, regulatory, and national security challenges posed by Bitcoin and other cryptocurrencies. The strategy could be made public as soon as February 2023, according to unnamed sources within the Biden administration. While some crypto enthusiasts welcome more clarity and legitimacy for the industry, others fear that stricter regulations could stifle innovation and adoption. The news of the impending strategy triggered a sell-off among some traders who wanted to exit before potential restrictions or taxes are imposed.
Rising interest rates
The U.S. Federal Reserve has been tightening its monetary policy in response to rising inflation and economic recovery. The Fed has been reducing its monthly bond purchases by $30 billion since December 2022 and is expected to end them by March 2023. The Fed has also signaled that it could raise its benchmark interest rate as soon as June 2023, depending on the inflation outlook. Higher interest rates make riskier assets like Bitcoin less attractive compared to safer alternatives like bonds or cash. They also increase the borrowing costs for crypto investors who use leverage or margin trading.
Market correlation
As Bitcoin matures and becomes more widely adopted, its price tends to move in sync with other assets like stocks or commodities. This means that any event that causes volatility or losses in the traditional markets can also affect Bitcoin’s price. For example, on Jan. 25, 2023, the Dow Jones Industrial Average dropped more than 800 points before recovering some of its losses by the end of the day. The S&P 500 and the Nasdaq Composite also suffered significant declines. The stock market sell-off was driven by fears of a global economic slowdown due to the ongoing Covid-19 pandemic, supply chain disruptions, and geopolitical tensions.
Silvergate collapse
Silvergate Bank, a crypto-friendly bank that provided banking services to many crypto exchanges and companies, announced on Jan. 26, 2023 that it would wind down its business and write off its assets. The bank had lost more than $8 billion in deposits since November 2022, when FTX, one of its major clients, collapsed due to a hack and a liquidity crisis. The closure of Silvergate’s Exchange Network, a payment platform that enabled fast and cheap transfers between crypto exchanges and customers, also disrupted the crypto market’s liquidity and efficiency.
Lawsuit against KuCoin
On Jan. 27, 2023, New York State Attorney General Letitia James filed a lawsuit against KuCoin, a popular crypto exchange based in Seychelles. The lawsuit alleged that KuCoin violated New York’s securities laws by offering unregistered securities to New York residents. The lawsuit also named Ethereum as one of the securities that should have been registered with the state. The legal action caused panic among some crypto investors who feared that other exchanges or coins could face similar scrutiny or penalties.
What’s Next for Bitcoin?
Despite the recent price drop, some analysts and experts remain optimistic about Bitcoin’s long-term prospects. They argue that Bitcoin’s fundamentals are still strong and that the current correction is a healthy and necessary part of the market cycle. They point out that Bitcoin has survived many crashes before and has always bounced back stronger.
Some of the bullish factors that could support Bitcoin’s recovery include:
Bitcoin’s supply is limited to 21 million coins, of which about 18.9 million have already been mined. As more people buy and hold Bitcoin as a store of value or an alternative asset class, the demand for Bitcoin could exceed its supply, driving up its price. According to Glassnode, a blockchain analytics firm, about 78% of the circulating Bitcoin supply is illiquid or held.
