The value of the cryptocurrency fell by 22% after another historic high reached against the background of political instability in the United States.
The cryptocurrency market, which last week beat its own records for capitalization, has experienced a 20% drop in the last two days, according to data from the Coinbase platform. Having reached the highest value in its history for January 8, it had collapsed by more than 22% to $32,529 by 17:00 GMT on January 11. The value of the cryptocurrency Ethereum (the second largest market capitalization after bitcoin) reached a historic high on January 10 – $1351, at 16:30 GMT on January 11, the value decreased by 25%, to $1020.
Over Sunday and Monday, January 10-11, Bitcoin experienced the biggest two-day decline since March 2020, Bloomberg reported. In general, the cryptocurrency market has been falling by 15%, according to Coinbase data. Its capitalization, which exceeded $1 trillion for the first time last week, has now shrunk by almost $140 billion.
On Monday, January 11, the UK financial regulator (FCA) warned that investors who invest in crypto assets should be prepared to “lose all their money.” Some investment companies that place funds in crypto-assets may overstate the potential benefit or understate the risks, the FCA writes, and the volatility of value and difficulty in assessing such assets put users at high risk.
Falling from Capitol Hill
In less than a month, Bitcoin has doubled in the price: back in mid-December 2020, the cryptocurrency was trading at $20,000, reaching a historic high. Asset growth was supported by growing interest from institutional investors.
It should be said that Bitcoin’s rising price was very appealing for both investors and traders. A lot of people were engaged in trading as Bitcoin’s price changed rapidly. Many people in 2020 first got in touch with trading and they were “forced” to find out more information about it. According to statistics, forex trading for beginners became one of the most searched guides in 2020, landing people the knowledge they needed to earn more. Because of the pandemic and goals to earn more money, crypto trading found its resurgence as well. People who know concepts of Forex trading sometimes draw comparisons with crypto trading and there are a lot of similarities between them.
Supporters of the cryptocurrency believe that it can become an alternative to gold as a savings asset: if Bitcoin manages to establish itself in this role, its value can reach $146,000, the newspaper quotes analysts JP Morgan. The rally in cryptocurrency, interrupted at the weekend, differs from the previous ones, as with the arrival of institutional investors it is increasingly seen as a means of protection against the weakening of the dollar and inflationary risks.
Bitcoin has risen rapidly for two reasons: the coronavirus pandemic and low capitalization compared to classical assets such as gold and equities. Authorities of different countries went to an unprecedented easing of tax pressures, approved direct cash payments to the population to support consumer demand and small business.
As a result, inflationary risks for the US dollar, and many other freely convertible currencies have increased significantly. During the second wave of the pandemic, investors paid close attention to Bitcoin as a new protective asset that ideally hedges inflationary risks because of its technical device. Investment banks, public companies, funds, including pension funds, and other major players in financial markets began to redistribute their capital, including Bitcoin, which led to the rapid growth of its capitalization, he adds.
In addition, investors’ appetite for risky assets fell last week due to political instability in the United States, which also supported the cryptocurrency: the Democratic Party again decided to impeach the incumbent President Donald Trump, accusing him of inciting voters to storm the Capitol. House Speaker Nancy Pelosi on Sunday, January 10, said the president’s attacks on democracy were intensifying and immediate action was needed. Part of the anarchic froth that supports Bitcoin after anti-government forces stormed Capitol Hill is now a little bit of receding.
The basic grounds for investing in Bitcoin remain the same: the U.S. is preparing to adopt new incentives, markets are still flooded with liquidity, which investors send to assets with positive returns.
What happens next?
The current correction was expected after the rapid growth in October 2020. Many market participants expected the correction much earlier, at the mark in the region of $30,000. Bitcoin began to fall due to abnormally rapid speculative growth and significant overheating of the market. In general, the reason for the fall was the traditional fear of loss of profits: a panic sell-off began.
The potential for a correction in Bitcoin is limited: after the fall in value to $32,000, market participants began to actively buy it out. After it, the cost can exceed $40,000.
The trend that Bitcoin is likely to grow in the near future is very high. All the factors of cryptocurrency growth remain: First of all, Bitcoin for young people is a certain protective haven, a kind of digital gold. Secondly, it is an escape from the dollar, which is printed now with great force, and people no longer understand what will happen to the American currency. Thirdly, regulation is tightening and investors are trying to escape from the regulator in some area of freedom. In addition, Democrats will accept quite powerful packages to help the economy, we can expect that the money will pour into the market, including cryptocurrencies.
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