Why Does Bitcoin's Price Rise and Fall?

Why Does Bitcoin’s Price Rise and Fall?

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Bitcoin’s price has gone from $32,983 on Jan. 22, 2021 to $35,811 on the morning of the same day one year later. In the year between, however, the price dipped below $30,000 in July and climbed above $69,000 as recently as Nov. 10.

On a five-year basis, things look a lot better for Bitcoin investors as shares have gone from just over $1,000 in 2017 to its current price that’s hovering around $35,000. That’s an incredible return when you consider that during the same five-year period Amazon (AMZN) - Get Amazon.com, Inc. Report stock went from $835.77 to $2852.86 while Tesla (TSLA) - Get Tesla Inc Report shares jumped from $50.59 to $943.90.

That means that for long-term investors, Bitcoin has been a better investment than Amazon or Tesla, and, honestly, it’s not close. The difference, of course, is that Amazon and Tesla sell stuff and that gives investors some basis for their valuations (even if they sometimes don’t seem rooted in reality).

Bitcoin has no product because it’s the product. Its value tracks more like a collectible than a share in a company.

Image Source: TradingView.

Why Does Bitcoin’s Price Go Up or Down?

Bitcoin trades based on how people feel about cryptocurrency. It’s not tied to a metric like sales. Instead, it’s a combination of fear of missing out and how investors view the currency at any given moment.

Prices also tend to fall or rise depending on the actions of regulators. When authorities indicate that they could ban or strictly regulate Bitcoin, prices go down. But when they are warmer or less firm prices go up.

“Rises are mainly down to positive perception in the media. Some news makes a lot of people think ’bitcoin really is the future! I’m gonna get some and/or buy more!,’” wrote Rhys Thomas at The Face.

Drops happen for exactly the same reason. Bitcoin, like diamonds or gold, has a finite supply though the cryptocurrency has an actual cap while precious metals and gemstones exist in unknown quantities.

Roughly 19 million bitcoins of the hard total of 21 million have been mined, which means they can be bought and sold.

“It took 12 years for the world’s largest cryptocurrency by market cap to reach that goal after the first coins were mined on Jan. 9, 2009,” wrote TheStreet’s Tony Owusu in December. “However, it will take exponentially longer for the remaining supply to be mined due to bitcoin’s halving schedule. The halving schedule is an inflationary control device where the reward for mining bitcoin is cut in half.”

This process discourages mining because it raises the cost required to mine a bitcoin, which discourages people from doing it (especially when the price of the cryptocurrency has fallen).

Tristar Media/Getty/TS

So, How Do You Make a Bitcoin Price Prediction?

The price of Bitcoin does not track based on any predictable data. It moves up or down based based on how people feel about the cryptocurrency at any given time. When buyers outnumber sellers the price goes up.

And, of course, influencers and celebrities have the ability to move the price of various cryptocurrencies. Sometimes that’s for no reason at all (or because the famous person wants the price to go up or down) and sometimes for a semi-meaningful one like that a company will accept on form or crypto or another as payment.

Bitcoin, like any other cryptocurrency, collectible, and many rare items can be manipulated. In many ways, however, this works a bit like large-cap stocks versus penny stocks. Because penny stocks trade at lower volumes than large-cap stocks, they’re harder to manipulate.

As the sort of king of crypto, bitcoin can’t be manipulated as easily as smaller cryptocurrencies simply because it trades at much higher volumes.

Eric Adams Pulls Crypto-Paycheck Stunt Hours Before Bitcoin Crash

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In November, New York City mayor Eric Adams found himself in what one might call a pissing contest with Miami mayor Francis Suarez, over who would accept more of his salary in cryptocurrency. “In New York we always go big, so I’m going to take my first THREE paychecks in Bitcoin when I become mayor,” Adams tweeted after Suarez stated that “100%” of his next check would be doled out in Bitcoin. “NYC is going to be the center of the cryptocurrency industry and other fast-growing, innovative industries! Just wait!” On Thursday, Adams, who was sworn in on New Year’s Day, informed New Yorkers that he had followed through with his commitment. “Promise made, promise kept. I took my first check in Bitcoin and Ethereum,” he said in a clip shared to Twitter.

Unfortunately for hizzoner, he chose a particularly bad time to put all of his eggs into the internet’s favorite speculative market. Hours after his announcement, both Bitcoin and Ethereum fell off a cliff, causing the mayor’s crypto check to lose about 10% of its value in the span of a single day. This latest crash, which resulted in a market loss of more than $205 billion, was partly triggered by the news that Russia’s central bank is weighing a nationwide ban on the use and mining of cryptocurrencies. Despite experiencing relative gains over the past two years, the crypto market has proven especially volatile of late. In September, the value of the world’s cryptocurrencies dropped roughly 9% after a Chinese crackdown.

As for New York’s chief crypto enthusiast, Adams isn’t exactly “taking his paychecks in Bitcoin.” Instead, the mayor said that he used Coinbase, a cryptocurrency exchange platform, to convert the funds from his check into Bitcoin and Ethereum. “Adams isn’t being ‘paid in Bitcoin’ any more than using his paycheck to buy Shake Shack equals being ‘paid in cheeseburgers,’” explained tech executive Anil Dash in a Thursday tweet.

While Adams has framed his paycheck publicity stunt as a way to showcase New York as “the center of cryptocurrency and other financial innovations,” his interest in crypto may also be related to his close relationship with crypto entrepreneur Brock Pierce, who reportedly gave Adams a ride to Puerto Rico—its own kind of crypto haven—on his private jet in November. (Adams had said he paid his own way.)

Adams isn’t the only U.S. politician to recently dive into the cryptoverse. A few weeks ago, Republican congressional candidate Josh Mandel listed his love of Bitcoin beside his commitment to the “Almighty God” and his family, while outlining the issues he represents. “Ohio must be a pro-God, pro-family, pro-bitcoin state. I promise we will be,” tweeted Mandel, who is running for a Senate seat in Ohio. In December, Florida governor Ron DeSantis announced he is exploring a program that would allow businesses to pay the state in cryptocurrency, stating, “Our view as the state government is this is something that we welcome and we want to make sure that the state government is crypto-friendly.”

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Crypto.com says hackers stole more than $30 million in bitcoin and ethereum

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Crypto.com said Thursday that cybercriminals had breached its security systems earlier in the week and made off with more than $30 million in stolen bitcoin and ethereum.

The cryptocurrency exchange Crypto.com, known for its viral commercial starring Matt Damon as well as its recent $700 million deal to rename the Staples Center in Los Angeles as Crypto.com Arena, said the hackers managed to bypass its two-factor authentication system and withdraw the funds from 483 customer accounts, according to a statement the Singapore-based crypto exchange posted Thursday on its corporate blog.

“Unauthorized withdrawals totaled 4,836.26 ETH, 443.93 BTC and approximately US$66,200 in other currencies,” the company said in the post.

That works out to around $15 million and $19 million in ethereum and bitcoin, respectively, based on current exchange rates. All customers have been “fully reimbursed” for any lost funds as a result of the hack, Crypto.com said.

The blog statement serves as a postmortem of the hack, which the company said happened Monday. It provides details of the event and the company’s detection and response to the cyber breach, as well as its “next steps,” but it does not offer information on the identity of the hackers behind the breach.

The timing of Crypto.com’s public statement, a full three days after the hack, is viewed by many as belated confirmation. According to an article from CoinDesk on Wednesday, about 4,600 etherium that was reportedly stolen from Crypto.com was “currently being laundered via Tornado Cash — an Etherium Mixer.” Thursday’s blog post also followed a Bloomberg interview Wednesday with Crypto.com Chief Executive Kris Marszalek, in which the CEO acknowledged that approximately 400 customer accounts were hacked.

“Given the scale of the business, these numbers are not particularly material and customer funds were not at risk,” the CEO told Bloomberg.

Reports of “suspicious activity”

The company first acknowledged something unusual was up in a January 16 tweet in which it announced the temporary suspension of withdrawals following user reports of “suspicious activity on their accounts.”

“We will be pausing withdrawals shortly, as our team is investigating. All funds are safe,” the company said.

We have a small number of users reporting suspicious activity on their accounts. We will be pausing withdrawals shortly, as our team is investigating. All funds are safe. — Crypto.com (@cryptocom) January 17, 2022

The company’s claim that “All funds are safe” was quickly challenged by customers, most notably Los Angeles-based jeweler Ben Baller, who immediately tweeted back, “I messaged yah guys hours ago about my account having 4.28ETH stolen out of nowhere and I’m also wondering how they got passed the 2FA?”

2FA called into question

Two-factor authentication, or 2FA, is the multistep security system that requires users to provide two distinct forms of identification, such as a one-time passcode in addition to a password, when logging into an online account. The commonly used security measure provides an extra layer of protection against weak passwords such as, say, a surname followed by “123.” While used by industries across the board, 2FA is considered a must for digital currency accounts. Monday’s breach, however, brings into question the reliability of 2FA in keeping digital assets safe from hackers.

For now, Crypto.com says it is sticking with 2FA, but not for long.

Upon discovery of the breach, the company “revoked all customer 2FA tokens” and used the 14 hours of downtime from withdrawal activity to “revamp,” according to the statement. Customers were then “migrated to a completely new 2FA infrastructure,” as an additional security measure.

That is only temporary, however, as the company says it plans to ditch 2FA for “true Multi-Factor Authentication (MFA), providing added strength for our global user base.”

Shares of Crypto.com have fallen more than 6% since news of the security breach, closing Thursday at 46 cents a share.

Experts React to the Fed’s Digital Currency Report and Falling Prices for Bitcoin and Ethereum. Here’s What Investors Should Know

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Federal Reserve Chairman Jerome Powell is pictured during a Senate committee hearing on Jan. 11. The Federal Reserve released its long-awaited report on a potential government-issued digital currency on Thursday, Jan. 20.

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It’s official: The Federal Reserve is toying with the idea of issuing a U.S. digital currency.

In a long-awaited report released Thursday, the Fed explored the costs and benefits of a government-issued digital currency, but deferred a final decision on whether to move forward. Instead, the Fed is giving the public and other stakeholders until May 20 to share their input before taking further action.

Unlike cryptocurrencies, which are typically created within the private sector and regularly see big price swings, a central bank digital currency (CBDC) would be a digital form of cash that’s issued and backed by America’s central bank. However, whatever move the Fed makes next could “fortify cryptocurrencies or detract from their value,” according to Grant Maddox, a certified financial planner and founder of Hampton Park Financial Planning based in South Carolina. “It depends on the direction our government chooses to take,” he adds.

The Fed was clear in the report that it won’t proceed with the issuance of a CBDC “without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.”

The Fed is attempting to be “politically savvy” as it weighs a digital dollar, says Salman Banaei, head of public policy in North America for crypto data firm Chainalysis. If the Fed had taken a clear stance on the matter, “they would have gotten a lot of political pushback,” says Banaei.

Hours after the report’s release, Bitcoin and Ethereum dropped below historic benchmark prices for the second time this month. The prices of Bitcoin and Ethereum haven’t been this low since July.

“There are two leading factors influencing the demand for crypto now: its value as an inflation hedge and its value as a risk asset,” says Banaei. “The perceived likelihood of a crypto future rises or falls based on regulatory risk too.”

Here’s what experts are saying about the report released this week, and what investors should make of it.

What Experts Are Saying About the Fed Report

Salman Banaei

Point of view: Head of Public Policy in North America for crypto data firm Chainalysis

Reaction: “What I was surprised by was how seriously the Fed took the notion of a CBDC. The crypto industry is excited to see that this is happening. A lot of the infrastructure that has been built to support the crypto industry could easily integrate the CBDC into existing providers. But the timeline for a CBDC is going to be far more extended — I think it’s going to take two to four years before we get another major milestone.”

Laura Shin

Point of view: Host of the “Unchained Podcast” and author of “The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze”

Reaction: “It’s not surprising that the Fed would be exploring a central bank digital currency because blockchain technology, although it’s still being developed, has many advantages over our current analog systems. Plus, it could help the US dollar maintain its global reserve currency status. It already looks like China could try to leverage its digital yuan to chip away at the USD’s status as the global reserve currency. It’s also not surprising that the Fed is not ready to announce any decision, but are currently just soliciting feedback, because a central bank digital currency raises a lot of questions about security and privacy, plus has the potential to disrupt existing financial institutions.”

Grant Maddox

Point of view: CFP and Founder of Hampton Park Financial Planning

Reaction: “They are keeping up with the likes of China and others who have advanced in blockchain. A digital U.S. currency may allow for quicker payments to foreign allies, improving our geopolitical outlook. The move could improve monetary policy decisions by allowing for easier distribution. We join about 90 other countries reviewing this option. The addition could add additional complexity to our world markets and distract attention from the dollar.”

Chris Chen

Point of view: CFP and Founder of Insight Financial Strategists

Reaction: “Blockchain has plenty of applications that don’t have to be a currency, so there are still plenty of things to do in the private sector. I firmly believe that no self-respecting government will give up control of its currencies to a private sector entity. Governments need to retain control of the money supply and of interest rates. Like it or not, these are major tools for managing economies. The U.S. is not the only country thinking of digitizing its currency. China is on its way, too, as are a number of other countries.”

What Does the Report Mean for Crypto Investors?

While there probably aren’t any immediate changes crypto investors should make based on the Fed report released this week, it’s a good reminder that policy makers are paying attention to how perceptions of crypto are taking shape.

“The Fed move means that people who were thinking of crypto as actual currency are going to get their bubble popped,” says Chen. “Many Bitcoin types were thinking that it is a currency and that it would replace traditional currencies. Well, not if the Fed, the European Central Bank, and other central banks have anything to say about it.”

The fundamentals of cryptocurrency investing remain the same. Experts say you should stick to the big two cryptocurrencies, Bitcoin and Ethereum, and only invest what you’re OK with losing or no more than 5% of your total portfolio. Always prioritize important aspects of your finances, such as saving for emergencies, paying off high-interest debt, and saving for retirement, ahead of cryptocurrency investments. As for where you buy and trade crypto, stick with a mainstream, high-volume cryptocurrency exchange, like Coinbase or Gemini, that proactively complies with evolving federal and state regulators.