People have said Bitcoin is dead after every drop in price or massive selloff, and every time they’ve been proven wrong. Although Bitcoin and other cryptocurrencies have seen bearish price action from the end of 2021 and going into 2022, the cryptocurrency industry is still in its infancy and far from dead.
If you’re new to cryptocurrency and accustomed to the price action of stocks, bonds, exchange-traded funds (ETFs) or other similar assets, the crypto market crash in May of 2022 probably looked terrifying. Bitcoin, the world’s leading crypto in terms of market capitalization, fell more than 40% in 15 days. Many cryptos experienced even steeper drops like Ethereum, the 2nd-largest crypto by market capitalization, which plummeted almost 50% in 12 days. Anyone who has been watching cryptocurrencies for at least a few years shouldn't be so shocked.
High volatility is part of the nature of the cryptocurrency market for many reasons. Each cryptocurrency generally has less available liquidity than many traditional financial markets, allowing prices to change faster. News can also play a much greater role in the price of cryptos than other assets. For example, when a coin is banned in a country or a popular celebrity no longer supports it, adoption often decreases and investors sell off rapidly. Also, the stock market has an advantaged in terms of volatility because it has regulations in place that help slow massive price movements. So-called circuit breakers automatically suspend trading on a stock or ETF for a set period of time if it rises or drops too quickly.
It’s important to remember that every time Bitcoin or Ethereum has fallen in the past they eventually recovered and reached new all-time highs. Volatility can (and probably should) be scary to the average investor, but it’s nothing new for crypto and it seems unlikely that this crash will be any different from the last. However, it’s still possible that Bitcoin and Ethereum will never recover to all-time highs.
- What is Bitcoin?
- History of Bitcoin
- Why is Bitcoin Down?
- See All 7 Items
What is Bitcoin?
Bitcoin is a decentralized digital currency or cryptocurrency, accessible to anyone with an internet connection. Users can send Bitcoin online between each other without involving a bank or another intermediary. Bitcoin is underpinned by a decentralized public ledger called a blockchain that records all transactions on it for everyone to see.
The network verifies and processes transactions using its consensus mechanism, Proof of Work (PoW). In PoW, network participants called miners solve complex puzzles with expensive hardware to add a block of transactions to the blockchain. Each block takes into account every single block added before it, hardening previous transactions to tampering. When miners find a solution and add a block, they are rewarded with a certain amount of Bitcoin and the fees accumulated from all transactions included in the block.
The price of the coin has exploded over the past few years, increasing the incentive for solving the puzzles. The difficulty of these puzzles is extremely important in securing PoW blockchains and it has risen dramatically for Bitcoin because of skyrocketing competition among miners. If it only took a small amount of computing power to solve them, it would be easier to take over the network. Anyone with more than 51% of the network’s computing power could theoretically take over the network, verifying only the transactions they want to verify. This is extremely unlikely to happen with Bitcoin because it is prohibitively expensive to reach that 51% mark.
Scarcity is likely one of the vital drivers of Bitcoin’s value and widespread adoption. Unlike Bitcoin, many fiat currencies can almost be printed at will by national governments (a noticeable exception is the euro), leading to differing rates of inflation. Bitcoin has a hard cap of 21 million on its supply written into its source code, meaning that the maximum amount of it in existence will probably be 21 million. It’s theoretically possible that this could be changed through Bitcoin’s decentralized governance. However, there aren’t any strong incentives to do so for the people who could make the change.
Once the supply hits its cap (which may not happen until about 2140), miners will earn transaction fees but no block rewards, decreasing revenue. If a conspiring group of miners was able to reach 51% of the computing power of Bitcoin, they could increase the maximum supply. You might think that miners would want to do this so that they could resume earning block rewards, but it would obliterate the idea that Bitcoin is scarce. The cost of attaining the 51% would be enormous and the price of Bitcoin would almost certainly nosedive as soon as the change goes live.
History of Bitcoin
In the throes of the 2008 financial crisis, an anonymous visionary going by the pseudonym Satoshi Nakamoto published a white paper called Bitcoin: A Peer-to-Peer Electronic Cash System. The paper started a slowly growing revolution to remove the central 3rd party from finance. Likely the greatest invention in the paper is blockchain technology that removes the need to trust finicky 3rd parties in transactions. Instead of putting their faith in financial institutions like banks or central governments, Bitcoin users trust the technology and that their transactions will be processed fairly and safely.
On May 22, 2010, an early Bitcoin investor named Laszlo Hanyecz made the first purchase with the cryptocurrency. He paid 10,000 Bitcoin, worth about $41 then — $310 million now — for 2 large pizzas. Since 2010, Bitcoin has seen dramatic growth in market cycles. Its price becomes overvalued, eventually crashes and then undergoes a long period of accumulation before the cycle repeats.
Many investors consider 2015 as the start of the most recent full cycle when Bitcoin was about $230. The cycle didn’t push Bitcoin to its then all-time high, near $20,000, until the end of 2017. It took another year for it to reach its local minimum of about $3,000 in December 2018.
Luckily for Bitcoin investors, that low hasn’t been seen since and the price rose to over $64,000 in April 2021. At the time of writing, Bitcoin’s price is hovering around $31,000 and the cycle (if it's even over) may not meaningfully repeat for a year or more. No one is certain of what will happen next or if Bitcoin will follow these cycles in the future.
Why is Bitcoin Down?
Bitcoin is down for a variety of reasons and it's impossible to pin down the exact causes of its recent crash. However, 2 major events that occurred within 1 week probably played a large role in the drop and lack of resurgence of Bitcoin’s price.
Tesla (NASDAQ: TSLA), the largest American electric vehicle company, revealed in an SEC filing in early February 2021 that it had purchased $1.5 billion worth of Bitcoin. In late March, the carmaker started allowing customers to buy cars with the cryptocurrency. Bitcoin’s price rose more than 20% in the subsequent 3 weeks. Only a few weeks later on May 12, 2021, Tesla’s CEO and “techno king'' Elon Musk tweeted that Tesla would no longer be accepting Bitcoin payments.
Tesla’s problem with Bitcoin lies in its electricity consumption and impact on climate change. According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin mining makes up about 0.55% of global electricity consumption. While mining does use some energy from fossil fuels, there is strong evidence that it uses a higher percentage of renewable energy than many other industries. Some estimates find that the percentage of renewable energy is about 79% while the CCAF believes it's closer to 39%. It’s currently impossible to find the exact figure because miners that use electricity from fossil fuels don’t want to publicly announce it. Musk tweeted that Tesla would resume accepting Bitcoin payments when renewable energy makes up a greater portion of the electricity used to mine it.
On May 18, 2021, the Chinese government banned financial institutions and payment companies from providing services related to cryptocurrencies. The announcement was not entirely shocking — China has made its stance on cryptos known in the past, but the timing was unfortunate for Bitcoin investors. It came only 6 days after Tesla announced it would stop accepting Bitcoin payments and may have accelerated Bitcoin’s downward spiral.
A bullish run in September of 2021 saw Bitcoin’s value rise above $50,000, but those gains were not sustainable as the token fell back to $40,000 in just a couple weeks.
On Nov. 10, 2021, Bitcoin reached its all-time high of $68,789, but it closed that day at $64,995. The token continued to stumble throughout the end of 2021 and into 2022, seeing an even steeper decline (highlighted by a short rally to just over $47,000 in March of 2022.)
By May 11, 2022, the token closed just above $28,000, now $40,000 off its all-time high from just 7 months earlier. After LUNA lost its peg the very next day, Bitcoin continued to suffer, and by June 12, 2022, it closed at $22.812.38.
Cryptocurrency Price Movements
The entire cryptocurrency market often follows Bitcoin in one way or another. If Bitcoin crashes, the rest of the market crashes, too. If Bitcoin explodes to new highs, many other cryptos eventually follow suit, although there is often a delay. A few weeks after Bitcoin reached its high, Ethereum hit its own. Ethereum fell even faster than its top rival, dropping to $2,100 less than 2 weeks after its peak.
Shocked by the recent tumble, the market’s future is uncertain and it seems like investors are taking fewer risks. In May, before the crash, only 1 stablecoin pegged to the USD was in the top 10 cryptocurrencies ranked by market capitalization. At the time of writing, USD stablecoins now account for 3 out of the top 10. The dip might only be a correction or it could be the beginning of a long bear market. Only time will tell.
Where to Buy Bitcoin
Bitcoin is likely the easiest cryptocurrency to buy because it’s the most popular. Nearly every cryptocurrency exchange and even a few stock brokerages support it so you have plenty of options. Some of the best trading platforms that offer Bitcoin are Coinbase, Binance, Crypto.com, Gemini, Robinhood and Webull.
Once you pick out the best exchange for your needs, you will have to verify your identity with the platform to start trading. This entails providing your address, Social Security number and a picture of your driver’s license or another valid ID. As soon as you finish the verification process you can fund your account by linking your bank account or other deposit methods supported by the exchange. Now find the trading pair with Bitcoin you want and complete your purchase.
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Where is Bitcoin Headed?
Bitcoin’s future is heavily tied to adoption and possibly institutional interest. Watch out for new (or old) celebrities, large corporations and governments entering or leaving Bitcoin to get an idea of where it may go next.
So, is Bitcoin Dead?
Bitcoin is not dead, for now at least. The debate over whether the astonishing 2020-2021 crypto bull market is over or not is still raging. Even many of those who believe that Bitcoin is now in a bear market don’t think it's dead. For Bitcoin to truly die, it will have to hit 0 or have no one left to trade it. You might still think that it is on a path to inevitable death, and you may be right, but right now, it's still full of life (and money).
Frequently Asked Questions
Is Bitcoin a physical currency?
No. Bitcoin is a digital currency you buy online and keep in a digital wallet, but you can sell it for real cash if you liquidate your position or investments.
Is Bitcoin a safe investment?
You should never invest money that you are not prepared to lose, but that doesn’t make Bitcoin unsafe. Cryptocurrencies are volatile, and you should watch the market carefully.
About Henry Stater
Henry is an expert in all things crypto. He stays up to date with all the latest coins, platforms and technologies in the field. He has particular expertise in the burgeoning decentralized finance ecosystem and loves trying out all the new platforms. He also always follows major events in other financial markets and geopolitics as a whole, especially when an event’s effects ripple through the crypto market.