An end-of-year selling spree is hammering Bitcoin’s value during the final week of 2021. The crypto standard has slipped by thousands of dollars per coin since its recent high in November. As of Wednesday morning, Bitcoin is trading under $48,000.
Financial institutions and large companies are fleeing from Bitcoin as the currency struggles to break back above $50,000. Bitcoin’s thirty-day rolling average price is trending negatively for the first time in months, signaling rough short-term losses for the standard.
The price drop and vicious sell-off are causing a domino effect for other cryptocurrencies. Smaller coins like Ether, Cardano, and Solana have also dropped in the past week. Some market experts think that these price corrections are occurring because crypto was overbought through the fourth quarter of 2021.
“Growth investments are very stretched and I think crypto is in that high price/sales multiple category,” VanEck CEO Jan van Eck tells Barron’s. “Prices are more reasonable than they were six months ago, but the only answer is to dollar-cost average,” says Van Eck. Dollar-cost average investing is a strategy that involves consistent deposits in an asset.
Bitcoin Regulation Concerns Enthusiasts
Bitcoin hit its all-time high in November after the SEC approved a futures-based Bitcoin exchange-traded fund. The ETF allows institutional investors to gain exposure to crypto without navigating exchange platforms or researching financial exchange rates. At the time, enthusiasm around the ETF helped push Bitcoin over $69,000 per coin.
However, the SEC is still hesitant to authorize a spot ETF that owns actual cryptocurrency. “It’s clear that the SEC wants jurisdiction over the cash crypto markets,” Van Eck continues in his interview with Barron’s. “It doesn’t seem like they’ll approve a Bitcoin ETF unless they’re forced to by a federal court.”
Van Eck’s company applied for a Bitcoin spot ETF in November. The SEC denied its request, and dozens of others just like it.
Crypto enthusiasts are concerned about the future of regulation in the nascent industry. Washington has suggested it may apply capital gains taxes to crypto exchanges, but Democrats and Republicans can’t agree on how to regulate the standard. “Washington is at a standstill in terms of crypto regulation,” muses Van Eck. “I don’t see movement in any direction.”
When regulation does arrive, the crypto industry will probably react poorly. Most cryptocurrency enthusiasts bought into the market to sidestep financial oversight. The goal of Bitcoin is to enable decentralized finance or DeFi, according to most investors. Regulations from the federal government fly in the face of DeFi, turning crypto into another security overseen by the SEC.
Inflation Rate Woes
There might be good news on the way for Bitcoin, though. The US inflation rate is still a concern for investors heading into the new year. If inflation stays as hot as some analysts fear, Bitcoin’s role as a digital store of value might help it recover from the sell-off.
Some analysts think inflation will slow next year, but not as much as the Federal Reserve hopes. The Fed unveiled plans to taper its fiscal stimulus program Earlier in December. This plan will shrink the volume of liquid capital in the economy, hopefully checking inflation. However, rising consumer prices and lower interest rates will probably keep inflation high even in the middle of 2022.
“I do think that we’ll see a gradual slowing in inflation over the course of 2022,” PNC Financial Services Group chief economist Gus Faucher tells Yahoo Finance. “After a big run-up in energy prices, they’re going to stabilize or come down next year. I do think that a lot of the higher price pressures from the reopening of the economy are going to fade — things like airfares, hotel rooms, new cars, used cars.”
The Consumer Price Index rose at its fastest pace since the 1980s through November 2021. Consumer prices have increased by nearly 7% year-to-date, pressuring American households. Shoppers surprised analysts in 2021 by eating the price hikes, a pattern that some think will lead to sticky inflation for the foreseeable future.
Bitcoin as a Store of Value?
Some crypto enthusiasts think that inflation will offer Bitcoin an opportunity to reclaim lost value. Since Bitcoin isn’t a government-backed currency, it has an upper limit. A central entity can’t mint more Bitcoin for circulation, which means the standard is inflation-proof. Savvy investors who want to safeguard the value of their assets could sink money into Bitcoin now and sell the coin later.
This strategy is identical to inflation hedging with gold stocks. Gold, like Bitcoin, is finite. No matter how many people want gold, there is a fixed amount of precious metal on the planet. Analysts believe that 2022 will provide a telling test for Bitcoin. If the standard can rebound from its current slump and retake the $50,000 mark, it might have a future as a speculative store of value.