On November 11, bitcoin recorded a peak of more than 68,000 dollars (60,000 euros), now the price has dropped to more than 42,000 dollars: a drop of 38 percent. “The hype seems to be over at the moment,” Ralph Wessels, economist at ABN Amro, told RTL Z.
Bitcoin and many other cryptos are known to be very sensitive to price fluctuations, but something seems to have changed. Where the price of bitcoin previously seemed to disregard other investment markets, it is different today.
“There is a very high correlation between stocks and bitcoin price performance,” Wessels says. That means that the bitcoin price chart makes about the same movements as that of traditional stock markets.
Analysts think this is because large investors, who traditionally trade on the stock and bond exchanges, are now also in bitcoin. If they use more or less the same strategy for their risky investments, be it stocks or cryptos, you will also start to see the price movements more similar.
“We should see it as an ordinary risky investment that goes up when the world is doing well and down when it doesn’t,” one currency trader summed up to FT.
Fear of corona and the central bank
The bad luck for bitcoin owners in that light is that the stock market sentiment is not going well at all. The emergence of the omikron variant caused a lot of fear among investors in December, because any new revival of the corona virus has the potential to cause major economic damage.
But bitcoin also seems to suffer from traditional factors, such as the policy of the US central bank Federal Reserve (Fed). This week, the minutes of the last meeting of the Fed showed that a rate hike is imminent. There are also calls for accelerated withdrawal of money from the market by selling previously purchased bonds. Bitcoin promptly lost 7 percent of its value.
By limiting the fresh supply of cheap money, it becomes more expensive to borrow and thus less money is put into circulation. As a result, money becomes scarcer and its value increases. And that is precisely the intention of the Fed, because the money is now quickly depreciating due to rising prices. Inflation in the US was almost 7 percent in December.
A large part of that cheap money recently flowed to the stock exchange and now also to cryptos. A tightening of the cheap money policy will therefore lead to falling prices, including bitcoin.
Incidentally, not everyone is pessimistic, not even in the traditional investment world. Wall Street bank Goldman Sachs predicted just this week that bitcoin has the potential to grow to USD 100,000.
The investment bank expects that bitcoin can partly take the position that gold traditionally has in the investment world. This is a stable investment that does not care much about economic fluctuations.