How is Bitcoin Faring Amidst an Unstable Market Situation?

While Bitcoin had a rough year in 2022, long-term holders continue to believe in it.

Ufo Bitcoin coin abducting a cow
  • Bitcoin (BTC) is currently experiencing one of its most challenging periods.
  • BTC has lost about 75% of its value since hitting $69,000 in November 2021, its all-time high.
  • The price of bitcoin fell to $28,000 after three months of the Russia-Ukraine war. 
  • The collapse of Terra’s LUNA and UST and, later, of FTX strongly impacted BTC’s price.
  • Bitcoin also suffered from high inflation in the US.
  • Despite the recent decline in BTC prices, long-term holders remain bullish.
  • BTC has outperformed some tech stocks, proving a reliable inflation hedge.

Bitcoin (BTC) is enduring one of the most testing periods in its history. Undoubtedly, the most valuable cryptocurrency lost a significant portion of its value due to numerous crises that almost brought the token to its knees. After hitting $69,000 in November 2021, a figure representing its all-time high, BTC lost about 75% of its value this year.

But 2022 was a disappointing year for BTC and the crypto space at large. Following the crypto boom of 2021, many tipped the industry to enjoy a prosperous year. Notable predictions for this year included a $100,000 value for BTC.

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Nevertheless, the sharp decline didn’t happen due to a direct issue with BTC itself. Instead, multiple micro and macro factors influenced it.

Notable Occurrences That Led to the Dip in BTC Value

The first significant factor was the Russian invasion of Ukraine. Before the Russian action, BTC began the year on a $47,000 price note. Three months into the conflict, BTC had plummeted to $28,000. 

Further, a sharp decline came into play due to the rising inflation occasioned by the increasing energy price across Europe. In a bid to soften Russia’s resolve, the West came up with numerous sanctions that also included its refusal to trade with Russia for gas. 

The collapse of Terra’s LUNA and UST also strongly impacted firms in the crypto space and BTC. Many businesses with an investment in LUNA halted the withdrawal of users’ funds and consequently filed for bankruptcy.

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The collapse of LUNA and its algorithm stablecoin UST resulted in a loss of $53 billion in users’ funds.

The eventual collapse of FTX further affected crypto firms and investors, therefore impacting BTC’s price stability. Alongside the disasters mentioned above, inflation continues to battle economies across the globe.

How the Fed Battles Inflation

As Inflation continued to hit hard, the U.S Federal Reserve Board, alongside other apex financial institutions, launched an assault to battle it.

On four occasions this year, the Fed hiked its interest rate to discourage more spending by individuals and businesses. Fed chair Jerome Powell echoed the position of the Fed to keep increasing the interest till inflation drops to 2%. Logically, the more the interest rate increases, the more inflation drops. 

Currently, the inflation rate in the US is way above the target of the Fed. According to the Bureau of Labor Statistics, prices rose 7.1% annually in November, down from 7.7% in October. In a new move against the prevailing inflation, the Federal Reserve raised its rates by 50bps, resulting in a new high since 2007. 

Impact of the Increasing Fed Rate on BTC and its Investors’ Reactions

The rising interest rates can have a direct impact on the price stability of BTC. With the increase in interest rates, access to credit becomes more expensive. This will manifest in a reluctant approach for individuals as they receive a minimal return when they take debt to purchase assets. Therefore, reducing the exploits of individuals to buy assets. 

For BTC, the cryptocurrency trades as a risk asset, so it’s likely that higher rates can spell more doom for its price. The interest rate will reduce the demand for BTC, causing its value to dip further. 

Despite the recent decline in BTC price, according to statistics by Glassnode, long-term holders remain bullish on BTC. They currently hold more than 13.908 million BTC, which is a record high. 

Despite BTC going down more in November after the FTX collapse, retail investors holding less than one Bitcoin still added 96.2k to their holdings as of Nov. 28, a record increase.

During the last 365 days, Bitcoin holders realized a total loss of $213B and held around six million BTC at a loss, the highest ever.

It appears that long-term holders of Bitcoin are unwilling to sell because they could incur substantial losses if they did.

Effect of the Increasing Fed Rate on BTC and its Investors’ Reactions.

Bitcoin recently outperformed some tech stocks, proving itself as a reliable hedge against inflation. Tech stocks like Google (-22.02%), Amazon (-23.79%), Apple (-24.65%), and Microsoft (-28.51%) performed below BTC (-18.39%) over the last six months. This figure indicates that despite the general downturn of crypto assets, BTC managed to pull a better market performance than other tech stocks.

BTC’s limited supply and decentralization made it a good hedge against inflation. In addition, the predetermined circulation of BTC implies that there will be no excess supply, helping it keep inflation at bay.

Similarly, BTC’s production/mining rate is designed to drop by 50% every four years. With that, BTC will become more scarce and less vulnerable to inflation.

On the Flipside

  • Though the number of long-term and retail investors is growing, Bitcoin mining is taking a beat due to unfavorable market conditions. Over the past year, there has been more than a 70 percent decline in miners’ revenue.

Why You Should Care

Bitcoin has faced many obstacles this year, but it has attracted record numbers of retail investors. It has also outperformed stable assets like gold in certain circumstances. While Bitcoin has not been a good hedge against inflation in the short term, the narrative shifts when we focus on long-term performance.

 

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This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Soumen Datta

Soumen has been a dedicated researcher and writer in the field of cryptocurrencies for the last few years. Even though Indian crypto regulations are still unclear, he believes that India will continue to innovate in the years to come. He loves to play his guitar and sing along in his spare time. He holds bags mostly in BTC, ETH, BNB, MATIC, ADA.