After a monumental bitcoin rally that increased the price of the most popular digital currency by a staggering 1,900% between January 2019 and April 2021, the cryptocurrency is now down 44% from it’s all-time high.
So what is fueling the recent sell-off in these digital assets?
Musk’s concern over high mining fees
In early 2021, Tesla (NASDAQ: TSLA) CEO Elon Musk disclosed the company bought $1.5 billion worth of bitcoin which sent cryptocurrency prices through the roof. However, Tesla recently reported it sold 10% of its Bitcoin holdings in Q1 which started the sell-off.
Further, in the last week, Musk raised concerns over high bitoin mining costs and tweeted, “We are concerned about rapidly increasing use of fossil fuels for bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel. Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.”
Musk also conducted a poll where he asked his Twitter followers if Tesla should use dogecoin as payment for Tesla vehicles which exacerbated the decline.
China’s warning, India’s request to halt engagement with crypto exchanges
According to a Reuters report, “Chinese regulators have tightened restrictions that ban financial institutions and payment companies from providing services related to cryptocurrencies, marking a fresh crackdown on digital money.”
The Chinese government claims that virtual currencies are not supported by any real value and directed financial institutions to stop crypto-related services. These companies were also told to monitor funds inflows and outflows related to cryptocurrencies increasing the scrutiny on investors.
Cryptocurrency bear market
Another reason for the sell-off is that the cryptocurrency markets have potentially entered bear market territory, a cycle that has been repeated in the past.
Bitcoin has lost close to 90% of its market value multiple times in the last decade due to concerns over lack of regulation, bans in developing markets such as India and China as well as profit booking.
On the other hand, bitcoin benefits from a first-mover advantage and has attracted massive institutional investment in the last year which might also mean the price decline might not be as steep as seen in the past.
Currently, it’s difficult to predict the direction of bitcoin and peer cryptocurrencies right now. However, analyst Gareth Soloway suggests that bitcoin might correct to $30,000 due to the recent Tesla announcement.
Moreover, the Bank of England governor Andrew Bailey criticized the rising popularity of bitcoin and other digital assets as it has no intrinsic value while economist Jorn Bibow is also not too enthused about these digital assets and explained bitcoin does not qualify as a currency.
Bibow stated that cryptocurrencies have been used for a slew of illegal activities that include money laundering and terrorism and this lack of transparency might come back to haunt governments.