Bitcoin Price Drops Dramatically Sending the Crypto Market in a General Crash

Mynah Marie

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Disclaimer: The author’s opinions are their own and do not constitute financial advice in any way whatsoever. Nothing published by the author constitutes an investment recommendation, nor should any data or content published by the author be relied upon for any investment activities.

The author strongly recommends that you perform your own independent research and/or speak with a qualified investment professional before making any financial decisions.

On January 5th, Bitcoin experienced a drastic price fall. The currency's price dropped below its critical support price of $45,456 to reach around the $43,000 level. This drop seemed to cause a general crypto market downward spiral, with Ethereum following Bitcoin's curve with a price drop of around 12% in the last 24h. Many other popular altcoins such as Solana, Polkadot, and Polygon followed that same downward trajectory.

While this apparent crash can seem alarming from an outside perspective, many experts believe it was to be expected. Indeed, the crypto market started shifting only minutes after the Federal Reserve announced, in the December FOMC meeting, its determination to decrease its balance sheet and increase interest rates in 2022.

The two factors contributing to the dramatic fall in BTC's price

In the past few years, Bitcoin has acted as a risk-on asset for most investors. People still view Bitcoin as an asset that can potentially generate strong returns and not an asset that provides some level of safety. The monumental increase in price Bitcoin saw starting around October 2020 until April 2021 made it one of the best performing asset classes on record.

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Bitcoin's price rise from October 2020 to April 2021.Screenshot by author.

That being said, experts believe that if the stock market starts to fall following the Federal Reserve's new direction, the price of BTC is very likely to follow suit. This might be one of the main reasons why we saw such a drop in Bitcoin's price in the last few days. An article released on Coin Telegraph states that "as stock markets corrected, BTC price followed suit by dropping below $44,000, setting off a cascade of liquidations that reached $222 million in less than an hour."

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Total liquidation.Source: Coinglass

Though the stock market is definitely an influential factor in the latest drop in the crypto market, it might not be the only reason why we saw such a drastic drop in the price of BTC in the last 24h.

Kazakhstan, the second-largest BTC mining country, is suffering from an internet blackout since January 5. Violent protests following the announcement of a drastic rise in fuel prices caused the government to resign and the country to declare a state of emergency. Kazakhtelecom, the leading telecom company in Kazakhstan, shut down the internet causing the country's network activity to fall down to only 2%.

With Kazakhstan being the second biggest contributor in hash power after the US, it only makes sense that such a loss would cause BTC's hash rate to collapse.

Where does this leave the crypto market?

Fortunately, there are other reasons why investors might choose to hold Bitcoin besides using it as a risk-on asset. Bitcoin can also be viewed as a non-traditional inflation hedge — an asset that could potentially help protect against the negative effects of inflation.

The rate at which new Bitcoins hits the market is consistent. Every block rewards minors by 6.25 BTC, a number predicted to decrease by half in about 2 and a half years. With a maximum amount of 21 million BTC in circulation, Bitcoin is an asset with a limited supply and an inflation rate that is constantly falling. This makes it very different from other storage assets like gold.

That's why many experts still say that for investors looking for long-term preservation of wealth, Bitcoin is still one of the best options there is. As seen many times in the past with the volatility of the crypto market, this recent crash isn't an indicator of what will happen with the overall market in the longer term.

People who will hold on patiently to assets like BTC or even Ethereum will most likely be rewarded in the future.

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I write. I code. I make music. Also, I'm passionate about crypto.

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