Understanding Bitcoin's recent value fluctuations Bitcoin, the world's first decentralized digital currency, has been on a roller coaster ride over the past year. Its value has skyrocketed by over 100%, thanks to several factors, including...
This story originally appeared on Due
Bitcoin, the world's first decentralized digital currency, has been on a roller coaster ride over the past year. Its value has skyrocketed by over 100%, thanks to several factors, including the creation of Bitcoin Exchange-Traded Funds (ETFs) and the Bitcoin halving process. But despite the stock market hitting all-time highs, the cryptocurrency has seen a 20% drawdown in the past month. This article explores the reasons behind this recent downturn and the potential implications for Bitcoin's future.
Table of Contents
ToggleBitcoin's constrained supply
One of Bitcoin's most appealing attributes is its constrained supply. Unlike traditional government-issued currencies, which can be printed at will, Bitcoin operates under a set of rules that dictate there will never be more than 21 million Bitcoins in circulation. This scarcity is one of the key factors that has driven its value upwards over the years.
The Bitcoin mining process involves solving complex mathematical problems to validate transactions and add them to the blockchain. It typically brings a small and consistent amount of new Bitcoin into the market. However, recent events have threatened to disrupt this balance by potentially introducing a large amount of Bitcoin into the market all at once.
View this post on Instagram
A post shared by Taylor Sohns – CFP®, CIMA®, MBA – Finance (@lifegoalinvestments)
The Mt. Gox factor
The source of this sudden influx is Mt. Gox, a Japanese cryptocurrency exchange platform that declared bankruptcy in 2014. At the time, Mt. Gox handled approximately 70% of all Bitcoin transactions worldwide. However, due to a series of hacks, the platform lost 850,000 Bitcoins, leading to insolvency and freezing all Bitcoin accounts.
After years of legal battles, Mt. Gox is now set to unfreeze approximately $8 billion worth of Bitcoin and return it to its rightful owners. This has raised concerns that these individuals, who have been forced to hold onto their Bitcoin since 2014 when it was valued at $600 per coin, might decide to sell their holdings now that the value has skyrocketed to $57,000. If this were to happen, it could lead to a significant increase in the supply of Bitcoin, causing its value to drop.
The US government's role
In addition to the potential sell-off from Mt. Gox account holders, there is also fear that the US government could introduce a large amount of Bitcoin into the market. The government has reportedly seized $12 billion worth of Bitcoin from crime-related activities and could potentially decide to liquidate these assets.
The looming "supply shock'
The combination of these two potential sources of new Bitcoin has led to what is referred to as a "supply shock.' This is particularly significant for Bitcoin, an asset specifically designed to avoid such shocks. Introducing a large amount of Bitcoin into the market could lead to an oversupply, which could, in turn, lead to a decrease in value.
Conclusion
In conclusion, while Bitcoin has seen a significant increase in value over the past year, recent events have led to a 20% drawdown. The potential influx of Bitcoin from Mt. Gox account holders and the US government could lead to a supply shock, negatively impacting Bitcoin's value. However, it is important to note that the cryptocurrency market is highly volatile and unpredictable, and these potential outcomes are merely speculative. Individuals should exercise caution when investing in cryptocurrencies and seek advice from financial professionals.
Frequently Asked Questions
Q. What is Bitcoin's constrained supply?
Bitcoin operates under rules that dictate there will never be more than 21 million Bitcoins in circulation. This scarcity is one of the key factors driving its value upward over the years. The Bitcoin mining process typically brings a small and consistent amount of new Bitcoin into the market.
Q. What is the Mt. Gox factor?
Mt. Gox, a Japanese cryptocurrency exchange platform that declared bankruptcy in 2014, is set to unfreeze approximately $8 billion worth of Bitcoin and return it to its rightful owners. There are concerns that these individuals might decide to sell their holdings, leading to a significant increase in the supply of Bitcoin, causing its value to drop.
Q. What is the US government's role in Bitcoin's value?
There is fear that the US government, which has reportedly seized $12 billion worth of Bitcoin from crime-related activities, could potentially decide to liquidate these assets, introducing a large amount of Bitcoin into the market.
Q. What is the looming "supply shock'?
The "supply shock' refers to the potential introduction of a large amount of Bitcoin into the market from two sources: Mt. Gox account holders and the US government. This could lead to an oversupply, which could, in turn, decrease Bitcoin's value.
Q. What are the potential implications for Bitcoin's future?
The potential influx of Bitcoin from Mt. Gox account holders and the US government could lead to a supply shock, negatively impacting Bitcoin's value. However, the cryptocurrency market is highly volatile and unpredictable, and these potential outcomes are merely speculative. Individuals should exercise caution when investing in cryptocurrencies and seek advice from financial professionals.
