Bitcoin Price Falls Below $20,000
- On June 18, 2022, Bitcoin’s price dropped under $20,000 for the first time since December 2020.
- Despite Bitcoin reaching its all-time high of $68,000 in November 2021, less than a year later, its price is less than a third of its highest value, displaying the high volatility of the cryptocurrency.
- Below are some pros and cons of investing in crypto that are important to consider before making any financial decisions.
On June 18, 2022, Bitcoin’s price dropped under $20,000 for the first time since December 2020. Bitcoin showed a remarkable growth during the COVID-19 pandemic, especially during the lockdown era, with the price of the digital currency surging by 300%. However, as the famous saying goes, “The higher they rise, the harder they fall,” which is what Bitcoin is experiencing.
Factors Leading to Bitcoin’s Price Falling
TerraUSD Coin Collapse
One factor that led to Bitcoin dropping in price was the collapse of stablecoin TerraUSD. A stablecoin is defined as a digital asset whose price is tied to a currency, making them more stable and less risky than other altcoins. Despite being posed as a lower-risk investment, the TerraUSD experienced a sudden drop in its price, wiping out more than half of its market value, going from $18.5 billion to $8.6 billion.
This price drop showcased that regardless of how safe an investment may seem, the possibility of a decline in value is always there. Consequently, the collapse of the coin sparked fears that a similar sequence could potentially happen in the crypto world, leading to broader selling for not only TerraUSD but other coins as well. Altogether, the panic selling caused by this event caused cryptocurrency markets to experience a downward spiral.
In Q1 of 2022, the Gross Domestic Product of the U.S. economy declined. The GDP is an economic measure used to determine the performance of a country’s economy. When GDP rises, the economy is growing and vice versa. Due to the rising cost of living, people had lower disposable incomes.
The lower disposable income levels meant they could not spend the same amount of money as before. Consequently, when the U.S. economy’s GDP lowered, it caused some panic, as when a country’s GDP declines for two consecutive quarters, it can be labeled as a recession.
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One main factor that has caused people to believe that a recession is imminent is the high inflation the current economy is experiencing. As the COVID-19 pandemic left many businesses without work, the government began giving out relief packages so people without jobs could still afford the living necessities they needed. However, the money received from the government caused the price of living to rise, and inflation to hit its highest point since 1990.
To combat the high inflation, the Federal Reserve began raising interest rates to reduce consumer spending; however, as this possible resolution has only been implemented for a short time, its intended long-term effects have not yet occurred, and more people have begun putting money aside in their bank accounts instead of their investment accounts as they fear the possibility of a recession in the near future could put a strain on their financial position.
Pros of Investing in Crypto
High Return Possibility
One of the main benefits of investing in crypto is the possibility of making much higher profits in the short and long term. For Bitcoin, the average rate of return on investment is around 18%, nearly double the average annual return made when investing in the stock market of 10%.
Thus, due to the higher than average returns posed by cryptocurrency, some riskier investors who wish to increase their returns exponentially, begin trading in these markets in hopes of achieving a higher year-over-year return. However, although Bitcoin and crypto allow an investor to make a large sum of money quickly, there are some other major setbacks of crypto that people should not overlook before considering investing.
Cons of Investing in Crypto
One of the main cons of investing in digital currencies is the potential market manipulation crypto markets are subjected to. The purpose of cryptocurrency exchanges is to have fewer restrictions and regulations on the market, allowing other people to manipulate the market to their advantage at the expense of other people’s investments.
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One recent potential example of market manipulation could be Elon Musk’s involvement with Dogecoin. Over the past year, Elon Musk tweeted a handful of times about Dogecoin on Twitter to his 95 million followers. Although the majority of these tweets were memes and were not supposed to be taken seriously, Musk’s tweets still caused the price of Dogecoin to fluctuate.
Consequently, the series of tweets posted by Musk landed him in hot water, as a lawsuit was filed by a former Dogecoin investor who claimed Musk used his social media platform to promote the cryptocurrency and make a profit when the prices surged.
The second issue which comes from investing in the crypto market is the possibility of investment scams that may occur. Although investment scams are less common with the more well-known coins such as Bitcoin and Ethereum, sometimes the lesser-known coins are investment scams waiting to happen.
One recent example of an investment scam was the rug pull from the Squid Game token. A rug pull refers to when a cryptocurrency is promoted on social media to maximize its number of users. Once reaching peak activity, the money invested would then be withdrawn by the creators, leaving investors wondering what to their money.
Due to the vast popularity of the show, a coin was created, but after a while on the market, the coin creator took all the money invested into the digital currency and ran off with it. Unfortunately, as the market is not as regulated as the stock market, the culprit was never caught, and the money was never returned to investors. Therefore, when investing, never blindly put money into anything. Instead, always thoroughly research, so you understand where your money is going.
Investments are viewed as risk assets, meaning that whenever a change occurs, the price of these assets in the crypto and stock markets fluctuates. Risk assets are asset classes that carry a risk when investing, including investments in the stock market, crypto, real estate, bonds, and other financial commodities.
For crypto, the volatility is much higher than the stock market, as Bitcoin experienced its record high in November 2021 of $68,000; but its current price is less than one-third of its all-time high less than a year after reaching that milestone. Although crypto investments have a possibility of making much higher returns than the stock market, one of its major setbacks is the steep decline/high volatility it possesses, so it is essential to proceed with caution when investing in digital currencies.
The Money Wrap-Up
Like any other investment, Bitcoin will experience times of lowered prices and the possibility of making a loss on the investment. However, the important thing to remember when investing in risky endeavors and, in general, is only to invest money that will have no negative repercussions on your current financial situation.
Regardless of how safe or quickly one can make money from an investment, it is best to proceed with caution and conduct individual research. Sometimes scammers prey on investors by making them a deal they can’t refuse, which can sometimes lead to a scam taking place.
Disclaimer: The mentioned remarks regarding cryptocurrency should not be considered financial advice. If you invest in cryptocurrency or any other business endeavors, do your due diligence before investing. CapWay is not liable for any losses made from investments based on the above information.
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