Why Bitcoin’s price is dropping?

Bitcoin is currently trading at $26359 (Coinmarketcap) This is the lowest since last year’s high performance. Let us discuss about why Bitcoin’s price is dropping?

Bitcoin Price History

The world was relishing on the success of Bitcoin in the year 2021. There were predictions of Bitcoin crossing $1,00,000 mark in 2022. However, it all came crashing down. We have reached near the mid of the year and Bitcoin prices are not rallying up. The prices have been falling since November. Bitcoin reached the $30000 mark briefly in December 2022.

This week we have seen a sharp decline in the market prices and it came down nearly 50% below its November peak.

Volatility of Bitcoin and why Bitcoin’s price is dropping?

Bitcoin has shown even higher volatility than what has been normal for crypto assets. It is now classed as a Risk Asset. This is because the risk assets can move in bearish or bullish way irrespective of the market conditions.

Because of the recent success and price rallying of Bitcoin, it has been considered as store of value. Some even termed it immune to price fluctuations. However, the recent fall in prices has shown that BTC is not immune to external market conditions such as Inflation, Fed Monetary policy, HNI crypto play as well as stock prices.

There are many factors contributing to the Bitcoin’s price dropping, the prominent one is getting back to normal, pre-pandemic lifestyle. During pandemic, we saw huge growth in online businesses and movement towards a cash-less society. This contributed to the growth of crypto assets mainly Bitcoin in the Covid-19 time. However, we are moving past this pandemic time and things are going back to as they were before. Data shows that the interest in NFTs etc. is also winding down.

Fed Monetary Policy

Bitcoin prices slashed down in January 2022 because of the Federal Reserve’s monetary policy. They took several measures to reduce inflation. The federal funds rate is likely to be increased by 50 basis points again in May 2022. The Federal Open Market Committee (FOMC) doubled the monthly rate at which it reduces asset purchases.

The fed funds rate was kept near zero for more developments to follow as needed in case of Inflation. A tighter federal policy, fiscally conservative one means bearish effect on crypto asset prices.

Recently we have observed a growing correlation between the market movements and Bitcoin price movements. After the announcement of new Fed monetary policy, traditional stock markets were down. Big traditional stock exchanges such as Dow Jones, S&P 500 and Nasdaq Composite Index were among those who lost after fed policy.

LFG trying to maintain UST $1 Peg

Luna Foundation Guard, the non-profit organisation to help develop Terra ecosystem is looking for ways to safeguard UST peg. Last week, Terra’s stable coin UST lost its peg and came down almost 40% in value. This impacted LUNA, native token of Terra, too, which lost 90% of its value.

UST has been a popular stable coin and it was based on algorithm. A simple demand and supply rules ensures UST maintains its peg through burning or minting of coins.

The goal of UST is to provide the benefits of crypto assets while removing the unpredictability surrounding it. UST is a stable coin which means it is backed by reserves of value of real assets. In this case it is pegged at USD and the price should always be $1. However, that was not the case since last week when UST lost its value thrice and still has not recovered fully.

To maintain the peg, LFG hosted a private token sale. LFG acquired $1.5 billion in Bitcoin to a total of around $3 billion in reserves as part of its plan to help prop up UST. They also announced that they are ready to lend out hundreds of millions of Dollars’ worth of Bitcoin to defend the peg of stable coin UST.

Bitcoin in the year 2022

Bitcoin had a rough start in 2022. This is on the back of the success during the Covid-19 period. This all changed in 2022 when investors interest start moving back towards store of value investments. There were also rate hikes by Federal Reserve to combat inflation. This is the reason why liquidity is drying up. Some experts predict that the speculative craze is dying down and we would see bullish activity on Bitcoin soon.