Bitcoin falls below $30,000 – worries about regulation and bubble formation

The digital currency reached its record high at the beginning of January causing many new traders flooding the market to find the best exchange for bitcoin, but now it is heading sharply downward. The momentum in this immature market has reversed.

Bitcoin is facing its biggest weekly loss since the Corona crash last March. The cryptocurrency is currently down eleven percent this week, and this Friday it fell below the psychologically important $30,000 mark.

Most recently, bitcoin was trading at around $26,422, according to data from analyst firm Coinmarketcap. Compared to the record high of 41,942 dollars on January 8, this is a minus of 37 percent.

Other digital currencies such as Ethereum and Ripple are also on the retreat after the recent price rally. The market capitalization of all cryptocurrencies combined fell about ten percent this week to $920 billion. “Especially over the weekend, further sales cannot be ruled out,” says Bitcoin analyst Timo Emden of the eponymous analysis house.

Behind the price losses is, on the one hand, the fear of stricter regulation under the new U.S. President Joe Biden. While regulation tends to be viewed positively, according to Emden, “US Treasury Secretary Janet Yellen, nominated by Joe Biden, could mobilize against cryptocurrencies and severely restrict their use.” During the week, Yellen had expressed concerns about cryptocurrencies during a Senate hearing. These could be used to fund illegal activities.

Is the market running hot?

On the other hand, investors are worried that the crypto market has run hot and prices have risen too far. Bitcoin has risen as much as 780 percent at its peak since the collapse in March of last year. That is a reason why many traders use software to predict the huge gains and drops in the price.

• Who was responsible for this rally is one of the many crypto mysteries. The market is difficult to keep track of with its many trading venues, and the majority of existing bitcoin units are owned by a few market participants. Around 95 percent of cryptocurrency is held in two percent of existing anonymous accounts.
• Nevertheless, the cryptocurrency has been in extreme demand in recent months. For example, fund manager Grayscale’s Bitcoin Trust grew by three billion dollars in the third quarter of 2020.
• On Wednesday, Blackrock also filed paperwork to add bitcoin futures as an eligible investment in two funds. It’s the first time the world’s largest asset manager has offered clients exposure to cryptocurrency. For the industry, this would be another accolade.

Between zero and $100,000

Jehan Chu, managing partner of blockchain advisory firm Kenetic Capital in Hong Kong, sees fears of another sell-off as “unfounded” because of this. A “natural correction” is currently underway as a result of profit-taking, but he predicts a price of 100,000 dollars before the end of the year. However, not everyone is that optimistic. The British Financial Conduct Authority (FCA) and the European Central Bank had recently warned of the dangers of crypto investments. Analysts at the major Swiss bank UBS warn crypto newcomers who now want to enter the record rally against a total loss.

With the threat of regulation and competition from sovereign crypto money issued by central banks, UBS Global Wealth Management says it is not impossible that major digital currencies will simply disappear again. The latest setback in the digital currency Bitcoin extended before the weekend. In the night to Friday, the price on the Bitstamp trading platform slipped below the mark of 30,000 U.S. dollars, at the low it was even only 28,800 dollars. Most recently, the price then stabilized a bit and was quoted around 31,700 dollars, which, however, is still almost 14 percent less than a week ago.

At the end of 2020, a price rally had set in, which had driven the Bitcoin up to around 42,000 dollars at the beginning of January. That was more than four times as much as still at the beginning of October. An increasingly broad acceptance of the digital currency had provided tailwind. Thus, it was tantamount to a kind of accolade that the payment service Paypal enabled its U.S. customers to trade cryptocurrencies. But it’s not just Paypal; major financial investors are also showing greater interest in digital currencies. Asset manager Fidelity, for example, launched a fund last year that invests in Bitcoin.

However, there are also repeated calls for stronger regulation of cryptocurrencies, which is always a burden. In addition, critics see the unsteadiness of Bitcoin as proof that it is unsuitable as a means of payment and financial investment. In addition, its generation – known as mining – with computers consumes a lot of energy and is expensive.

Iran blames bitcoin mining

Iran’s metropolises suffer from power outages and smog. Mining farms that use the cheap electricity to mine cryptocurrency are said to share the blame. Iran’s leadership has placed a share of the blame on energy-intensive bitcoin mining for current problems with electricity supply and massive smog in cities across the Islamic Republic. Media report that the capital Tehran and other metropolitan areas in the country have experienced recurring power outages in recent weeks. At the same time, some of the smog has reached unhealthy levels, Bloomberg writes.

While other reasons have also been mentioned, illegal Bitcoin miners have also been repeatedly named as partly responsible by officials. The cryptocurrency had recently reached new highs, making mining more attractive again. In the meantime, however, the value has fallen again.

Bitcoin as an alternative to the dollar

The Islamic Republic has been the target of increasingly draconian economic sanctions by the United States for years, which were imposed after the nuclear agreement was terminated. Exclusion from global trade relations is weighing on Iran’s economy, while at the same time subsidized electricity prices in the resource-rich country are lower than almost anywhere else in the world. For years, therefore, the country has been a popular location for cryptocurrency miners specializing in energy-hungry bitcoin calculations. Previously, China had ordered a crackdown on the practice, driving many miners to other states.

Iran’s leadership had initially reacted inconsistently to this influx of crypto miners. Just like other states pushed out of global financial relations by the U.S., the Islamic Republic had welcomed cryptocurrency as a possible alternative, Radio Free Europe explains. On the other hand, concerns about electricity supply are not new: in 2019, mining farms had been closed to counter their high electricity consumption. Then, in July 2019, the Iranian government introduced a license for legal cryptomining and has been taking action against unlicensed miners ever since.

Such measures are probably being considered again now, but the country’s problems are deeper, Radio Free Europe continues. Bloomberg writes that the country’s power grid is in a state of disrepair and that power plant operators have already had to switch to lower-quality fuel because of the overall increase in winter demand. In doing so, they would be contributing to the immense smog problem. Meanwhile, a cryptocurrency expert from Tehran assured the Washington Post that mining takes up a very small percentage of the country’s electricity consumption. The poor state of the power grid, on the other hand, has been known for years, he said.

Bitcoin forecast for 2021

With a few exceptions, the largest cryptocurrencies are all performing strongly at the start of the year. But where does the Bitcoin price go from here – straight towards the 100,000 US dollar mark or will a setback follow first? The rapid price development of the past weeks and days is exaggerated in the eyes of many market participants and could lead to a temporary correction.

Memories of the striking rise in December 2017 and the subsequent deep fall in spring 2018 are coming to mind. The price explosion in winter 2017 brought Bitcoin widespread media coverage for the first time. Today, things look different: Cryptocurrencies are known to many people from the media. But who of those who do not yet own Bitcoins dares to invest now? Dr. Hans-Joerg Naumer warns against too much euphemism: “For me, Bitcoin is not an investment vehicle, but a pure narrative, a highly contagious one at that. Nobel economics laureate Robert Shiller, to whom I owe this thought, puts it succinctly: ‘Bitcoin has no value until people believe it does.’ If no one gets ‘hooked’ on that narrative, it’s over.”

Potential for a further price rise in 2021 definitely seems to be there, if you look at the current development and the facts for the recent price development. On the other hand, however, some experts see a bubble forming precisely because of this rapid rise. And of course, there is also no guarantee that there will not be another price crash like in spring 2018. Investors who are just now jumping on the bandwagon could be disappointed, at least in the short term. However, thanks to the central banks’ ongoing ultra-loose monetary policy and a lack of alternatives in high-yield investments, the factors for further price growth could be intact in the medium to long term.