Cryptocurrencies have lately been the most popular asset to be exchanged throughout the exchanges. The asset has garnered attention despite its ambiguity and volatility. The key reason is its independence from the physical world, which makes the asset resistant to any political, economic, or environmental changes in the international community. Of course, security and profit are also the major components that enable the growth of Bitcoins. The maturation of the asset has attracted institutional investors, which permits more liquidity into the market, and demand has exceeded the supply.
Furthermore, to provide an impetus to the boom, the various famous personalities in finance talked approvingly of its potential to evolve as a store of value to hedge against inflation from increased government expenditure during the pandemic. However, the asset is undergoing a rollercoaster ride of late, rising and dropping quickly. The rise and fall of assets may be linked to rising separation between the two groups, one favouring the Bitcoin, considering the positive side of the asset, which includes the individual investors and traders and institutional investors like Morgan Stanley and Economic giants like Elon musk. The other opposing the asset are generally government bodies and Banking institutions confronting and looking at the asset’s bad side.
THE BOOM OF BITCOIN
Despite the worldwide epidemic causing havoc on all critical economies globally, the bitcoin sector has continued to thrive. During this epidemic, numerous crypto companies have developed in response to the ever-increasing demand for Bitcoin and similar cryptocurrencies. Th cryptocurrency market capitalisation of crypto has grown from $192 billion in January 2020, to $758 billion in January 2021 and $2.24 trillion in January 2022. It is mostly propelled by Bitcoin’s surge. Bitcoin, in particular, has been on a rampage for quite some time and now accounts for around 69% of the overall market value. Just six months ago, the price of one Bitcoin was ~₹6,00,000, and now Bitcoin is selling for ~₹25,00,000, which is almost a 400 per cent growth in the price.
• Institutional Investors
Bitcoin is increasingly seen as a safe-haven asset protecting investors from market instability and inflation. Also, the present societal and economic context encourages individuals to store less cash and remain protected against market swings. Recently, public firms have begun to convert their cash treasuries to cryptocurrency. Microstrategy, a publicly-traded firm in the United States, transferred $425 million in cash reserves to Bitcoin. Numerous businesses have now followed suit. The faith of business giants in cryptocurrencies and their entry into the sector has given it more credibility as a medium of exchange and asset storage. The credibility has increased the demand, which has surpassed the demand-supply, high asset price, and facilitated a boom.
• Bitcoin as Digital Currency:
Cryptocurrency is a digital currency that may be used as a medium of trade and a store of value. While it has only just begun to gain traction as a legitimate payment mechanism, it has established itself as a new asset class. Even though the public is hesitant to use it for transactions, many desire to convert their cash to cryptocurrency because they feel its deflationary nature makes it a superior store of wealth and hedge against inflation. After the Reserve Bank of India withdrew its prohibition on cryptocurrencies, particularly in India, its investors saw a considerable increase. Further, as cryptocurrency becomes more accessible to the general public, more retail investors are ready to pay a premium for a piece of the asset class.
Supply crush owing to Bitcoin halving
Halving is a critical event on the Bitcoin blockchain. It creates inflation in the cryptocurrency price by limiting the supply of bitcoin and rising demand for it. The halving of Bitcoin has ramifications for all stakeholders in the Bitcoin ecosystem. This year saw the third Bitcoin halving. Bitcoin halving is a significant event that occurs every four years or after every 210000 transactions on the Bitcoin network. The Bitcoin network operates because it creates new bitcoins via a process known as Bitcoin mining. Bitcoin miners do this via the verification of Bitcoin blocks, which are collections of Bitcoin transactions. A miner who successfully verifies a block of transactions and adds it to the Bitcoin network is rewarded with a certain quantity of bitcoins every ten minutes. After the halving, the reward is set at 3.125 BTC. for each valid block mined. The reduction in reward will reduce the number of coins mined. Due to the limited incentive, the supply is currently 21 million Bitcoins, the market currency’s circulation diminishes as the incentive lowers. And when awareness of the asset’s scarcity grows, demand increases, resulting in a higher price.
BUST OF BITCOIN
• Regulators Crackdown
Along with the boom, the asset is experiencing a bust due to the asset’s negative side being exposed and having an impact. Governmental and banking institutions are the driving forces. Bitcoin and ether, the two most popular digital currencies, plummeted by up to 30% and 45 per cent, respectively. This is because Bitcoin and kindred assets have come under growing scrutiny from authorities worldwide as they have evolved to become a more significant element of financial markets. Regulators are worried about the implications for security and the loss of power. The drop in value began with China’s decision to prohibit banking and payment institutions from offering bitcoin services. Additionally, it cautioned investors against speculative cryptocurrency trading. Following that, UK banks suspended payments to cryptocurrency exchanges, FBI agents seized millions of dollars in bitcoin from criminals, and the IMF issued an August 2021 warning to countries considering using cryptocurrencies as legal tender, stating that widespread use would jeopardize “macroeconomic stability” and jeopardize financial integrity.
• Institutional Retreat
Furthermore, the institutional investors that served as the asset’s mediators started withdrawing their backing for various reasons, including the environment and fear of strict government regulations. Elon Musk is a prominent proponent of cryptocurrencies. Tesla said in May 2021 that it would stop accepting bitcoin payments due to environmental concerns. Following that, JPMorgan said that institutional investors looked to be shifting away from bitcoin and toward gold, based on futures contracts.
• Security Myth
Finally, a crypto heist – Poly Network, a group of crypto hackers, took $600 million in August before returning more than a third of it four days later, claiming they did it “for fun” and “highlight the weakness” in the system before others could. The heist shattered private and institutional investors’ faith in the system. To provide further incentive, the government crackdown and withdrawal of big players prompted investors to shift their focus to conventional investments, lowering demand and precipitating a price decline.
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