- Date : 23/02/2022
- Read: 7 mins
In the early part of 2022, Bitcoin saw a sharp correction of more than 50%. Will Bitcoin bounce back, recover losses, and hit a new high? This article explores the causes of this correction and the factors that can help Bitcoin rally and scale new peaks.
In the last one year, the price of Bitcoin has been extremely volatile. The Bitcoin rate first hit a high, after which the Bitcoin value fell more than 50%. It regained all the losses and went on to make another new high. But, this did not last too long, and once again, the price of Bitcoin fell more than 50% and is currently consolidating.
The above chart shows the one-year volatility in Bitcoin prices:
- In April 2021, the price of Bitcoin peaked above $63,000.
- It then entered a corrective phase, gathered momentum, and by July 2021, bottomed out below $30,000.
- It once again started rallying, crossed the earlier high, and made a new peak at above $67,000 in November 2021.
- It once again entered a correction phase, and the beginning of 2022 wasn't great - it bottomed out below $40,000 in January 2022.
- Since then, it has consolidated and trading at levels near $44,000. Crypto investors are looking forward to the next up move.
- The chart above amply clarifies that the crypto market and cryptocurrency investing is meant for investors with an aggressive risk profile.
Before we discuss what can be the possible triggers for the next up move, let us understand some of the reasons for the current fall.
Why is Bitcoin falling?
Some of the reasons why Bitcoin has lost more than 50% of its value from the peak are:
1) Withdrawal of liquidity by central banks due to rise in inflation
In the last one year, inflation has been rising in the US and other economies across the world. Inflation has risen above 7% in the US, which is a multi-year high.
The above chart shows that the US inflation rate has reached 7.5% in January 2022. The high inflation rate will lead to US Federal Reserve draining liquidity and increasing interest rates.
Central banks across the globe have started withdrawing the liquidity they had infused when the COVID-19 pandemic started. Some central banks have started increasing interest rates, and others are expected to follow suit. With the reduction in liquidity and increase in interest rates, investors are selling risky assets like Bitcoin and investing in fixed income instruments.
2) Economic uncertainty due to Omicron
By the end of 2021, many economies were starting to emerge from the COVID-19 pandemic as the cases declined. But then, the Omicron variant emerged in South Africa and started spreading rapidly across the globe. Due to this, global cases surged once again, and many countries had to either impose restrictions or strict lockdowns. Omicron has slowed down the global economic recovery, leading to a fall in Bitcoin prices and other risky asset classes (such as equities) across the globe.
3) Bitcoin has always been volatile
Bitcoin, by nature, has always been a very volatile asset class. Based on Bitcoin news, its prices go up sharply or move down sharply. In the last few years, Bitcoin has seen sharp rallies of more than 100% and then big falls of more than 50%. So, the current fall may be one of the predictable drops after a sharp up rally.
4) Geopolitical issues
Tensions between Russia and Ukraine has resulted in Russia deploying its armed forces on the border. Due to this and some other geopolitical tensions in the Middle East, crude oil prices have crossed $90 per barrel. High crude oil prices can derail the global economic recovery, which is already fragile due to Omicron. This is also responsible for the sell-off in Bitcoin and other risky assets.
5) Internet issues in Kazakhstan
After China banned Bitcoin and other digital assets, many Bitcoin investors moved to Kazakhstan. Due to this, Kazakhstan accounted for a big chunk of Bitcoin mining globally. Currently, the country has been facing public protests due to local issues. It has resulted in the government shutting down internet access across the country. With no access to the internet, Bitcoin mining has ground to a halt. This has had a negative impact on the price of Bitcoin.
The expected resurgence of Bitcoin
Will Bitcoin bounce back this time too, as it has always done in the past after every fall? Once the factors responsible for the current downturn get corrected, it is expected to bounce back. Let us look at some of the reasons that can help Bitcoin rise once again.
1) Kazakhstan internet shutdowns are temporary
The internet shutdowns in Kazakhstan are temporary and should get resolved soon. Once that happens, Bitcoin mining activity will reach normalcy again. That will send a positive signal to the Bitcoin trading community and encourage Bitcoin prices to move upward.
2) Limited supply and increasing adoption
The supply of Bitcoins is limited, at only 21 million. Of this, around 19 million (90%) have already been mined and are in circulation as per the Bitcoin latest news. So, on the one hand, we have a limited supply. On the other, more and more new investors are joining the cryptocurrency bandwagon every day. Many countries today accept it as a digital asset class, and El Salvador has even recognised it as legal tender. We keep hearing about new use cases of Bitcoin regularly. So, Bitcoin will suffer a ‘scarcity premium’ from time to time, which should help its price rise.
3) Technical bounce-back from oversold territory
Technically, Bitcoin is trading in the oversold territory after the recent price correction of more than 50%. The current price fall seems to have stemmed, and it is consolidating. Once the consolidation is over, the price will likely move up once again.
4) Omicron is not as dangerous as it was earlier thought
Initially, when the Omicron variant of COVID-19 emerged and started spreading rapidly, there wasn't much information available about it. It led to panic among investors and a sell-off in Bitcoin and other risky asset classes. Over time, the medical community has analysed Omicron and concluded that even though it spreads rapidly, it is not as big a threat to human health as feared earlier. As a result, many countries have either unlocked or eased restrictions. Economic activity around the globe has once again started picking up, and this should help Bitcoin and other risky assets rally once again.
5) Easing of geopolitical tensions
The US, European Union (EU), and many other countries are using diplomatic channels to defuse geopolitical tensions between Russia and Ukraine. Once that happens, crude oil prices are expected to cool off, which can reduce global inflation. This is expected to help spark a rally in Bitcoin prices.
6) Normalcy in global financial markets
Countries like the US, UK, EU, India, etc., are expected to begin their interest rate hiking cycle soon. Once the central banks start increasing interest rates, their commentary will provide clarity on the future inflation outlook, how many rates hikes are expected, etc. The central bank commentary will help eliminate the current uncertainty. Once there is some certainty about inflation coming under control, and a stable interest rate regime is in place, Bitcoin and all other risky assets will rally again.
The accompanying image shows how the US 10-Year Treasury yields have moved up from around 1.2% to 2.0% in the last six months, signalling that a rate hike from the US Federal Reserve is coming soon.
Whenever Bitcoin prices have undergone a sharp correction in the past, many experts have written its obituary, assuming it to be the end of Bitcoin and other cryptocurrencies. But Bitcoin has never failed to bounce back. After every correction, it has not only recouped earlier losses but gone on to hit a new high. So, will it be any different this time? Or will Bitcoin news be positive, and shall we see Bitcoin bounce back and prove its naysayers wrong once again? Only time will tell.