Investors have witnessed a bloodshed in cryptocurrency markets in recent weeks, as crypto struggles to find a direction amid a global selloff in financial markets. The spike in coronavirus cases, driven by omicron, are causing havoc in stock markets, prompting investors to reduce their exposure to risky assets. Furthermore, the central banks’ monetary tightening plans are complicating an already bewildered market.
In the midst of the turmoil, digital coins have taken a massive beating, with Bitcoin (BTC) trading below $50,000 after reaching record highs of nearly $68,000 in November. It is currently hovering around $48,000 as of this writing. Despite some short-term volatility, the long-term future outlook remains positive as large institutions continue to show interest in blockchain, and people understand the technology’s benefits better than ever.
Why is Bitcoin’s Price Falling?
The rise of covid cases, along with central banks becoming more hawkish in order to fight inflation thanks to supply chain bottlenecks and rapidly rising demand, are both currently causing instability in financial markets. As of now, countries like the Netherlands and Germany are rushing to raise restrictions in an attempt to stop infections from spreading even further.
Simultaneously, the U.S. Federal Reserve has decided to accelerate its tapering process, beginning with a $30 billion reduction in monthly bond purchases and three rate hikes next year. This is likely to withdraw liquidity from markets and adversely affect the risk appetite of investors. This is why the values of risky and growth stocks have plummeted. As a result, the crypto sector has seen a drop in investor sentiment. However, investors should keep in mind that the future outlook of cryptocurrencies remains positive as the sector is backed by solid fundamentals.
To understand the future outlook of Bitcoin, it is important to note that only 21 million Bitcoins can come into circulation. With between 18 and 19 million Bitcoins already mined, we are coming closer to the digital coin’s upper supply limit (but it’s worth noting that due to how halving works, experts believe we won’t be fully mined out until the year 2140). Either way, we can deduce from the laws of supply and demand that as more people embrace Bitcoin, its demand is likely to rise. When demand rises while supply remains constant, it stands to reason that the price of Bitcoin will only go up due to its scarcity.
Besides Bitcoin, cryptocurrencies are now being rapidly adopted by consumers and corporations, inviting comparisons to the early days of the internet, which was initially questioned by a majority as well. According to reports, people adopted the internet at a rate of 63% per year, while Bitcoin is currently being adopted at a rate of 113%. Even if we simply assume that Bitcoin will likely be adopted at the same rate as the internet, we are likely to have 1 billion Bitcoin users by 2024 and 4 billion Bitcoin users by 2030. This rapid surge in mainstream adoption is likely to support higher Bitcoin prices in the coming years.
Bitcoin’s Regulatory Outlook
Another development that is likely to have a positive impact is an uptick in regulatory oversight, which is likely to improve the credibility of the digital sector among investors. This is because exchanges and funds have to follow specific rules protecting users from fraudulent activities. The American government has been paying close attention to the sector over the last year, and President Joe Biden recently signed an infrastructure bill requiring crypto exchanges to notify the IRS of all transactions conducted on their platforms. Similarly, Treasury Secretary Janet Yellen has advocated for stablecoins to be subject to federal regulation as well.
Will Bitcoin prices rebound in January of 2022?
This year, Bitcoin soared 14% in January and 30% in the previous January. Looking at the last ten years on average, Bitcoin’s price usually surges 10%, which could mean if we see a similar uptick in 2022, the price will be above the critical resistance level of 50K. If that happens, that could clear the way for the Bitcoin to begin its march towards its all-time high.
However, the volatility of Bitcoin is also typically most pronounced in January, which means investors should expect some mammoth moves. Looking at the trend, it is likely that Bitcoin whales will likely buy Bitcoin on any retracement. Companies like MicroStrategy have used the “buy the dip” strategy, capitalizing on the price drop by acquiring digital coins at deep discounts. MicroStartegy recently purchased $82.4 million in Bitcoins, paying an average price of $57,477 for the digital currency. With a total investment of $3.66 billion, the company now has 122,478 Bitcoins. El Salvador, likewise, purchased more Bitcoins in order to support its decision to become the first country to adopt Bitcoin as legal tender.
The Bottom Line
Overall, the current situation and the drop in Bitcoin prices are the result of an abnormal situation that has affected all financial markets, and cryptocurrencies have not been immune to the selloff. However, its fundamentals remain solid, which is likely to encourage greater adoption and higher price growth in the long run.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
