Why the price of bitcoin has been falling

The price of bitcoin fell as much as 29 per cent Wednesday after the China Banking Association warned member banks of risks associated with digital currencies. Other digital currencies suffered sharp declines as well.

Bitcoin’s volatility was on full display: The decline had narrowed to below 10 per cent in early afternoon trading. Bitcoin has lost about 40 per cent of its value since April 13 when it hit a high of more than US$64,606 per coin.

Before Wednesday, Tesla’s decision to not accept the digital currency as payment for cars, along with concerns about tighter regulation of digital currencies, were major factors in the decline. The price is still up about 31 per cent in 2021 and nearly 300 per cent from a year ago.

Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who ‘mine’ them by lending computing power to verify other users’ transactions. They receive bitcoins in exchange. The coins also can be bought and sold on exchanges with US dollars and other currencies.

Some businesses take bitcoin as payment, and a number of financial institutions allow it in their clients’ portfolios, but overall mainstream acceptance is still limited.

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with libertarians as well as tech enthusiasts, speculators – and criminals.

Bitcoins have to be stored in a digital wallet, either online through an exchange like Coinbase, or offline on a hard drive using specialised software. According to Coinbase, there are about 18.7 million bitcoins in circulation and only 21 million will ever exist. The reason for that is unclear, and where all the bitcoins are is anyone’s guess.

On Wednesday, a statement posted on the Chinese Banking Association’s website said financial institutions should “resolutely refrain” from providing services using digital currencies because of their volatility.

Virtually every cryptocurrency fell after the industry group’s statement.

As of 1:10 p.m. Eastern time Wednesday, bitcoin was down more than 7 per cent at around US$40,310 per coin. Most cryptocurrencies lost between 7 per cent and 22 per cent of their value and shares of Coinbase dropped 5.4 per cent.

The value of bitcoin can change by thousands of dollars in a short time period. On the last trading day of 2020, bitcoin closed just under US$30,000. In mid-April, it flirted with US$65,000. The price bounced around after that, with some notable swings, before taking a decidedly negative turn last week.

Elon Musk announced in February that his electric car company Tesla had invested US$1.5 billion in bitcoin. In March, Tesla began accepting bitcoin as payment. Those actions contributed to the run-up in bitcoin’s price, and Musk also promoted the digital currency dogecoin, which also spiked in value.

However, Musk reversed course in just a short time, saying last week that Tesla would stop accepting bitcoin because of the potential environmental damage that can result from bitcoin mining. The announcement sent bitcoin falling below US$50,000 and set the tone for the big pullback in most cryptocurrencies.

A number of bitcoin fans pushed back on Musk’s reasoning. Fellow billionaire Mark Cuban said gold mining is much more damaging to the environment than the mining of bitcoin.

A 2019 study by the Technical University of Munich and the Massachusetts Institute of Technology found that the bitcoin network generates an amount of CO2 similar to a large western city or an entire developing country like Sri Lanka. But a University of Cambridge study last year estimated that on average, 39 per cent of ‘proof of work’ crypto mining was powered by renewable energy, primarily hydroelectric energy.

How bitcoin came to be is a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto. Bitcoin was then adopted by a small clutch of enthusiasts. Nakamoto dropped off the map as bitcoin began to attract widespread attention. But proponents say that doesn’t matter; that the cryptocurrency obeys its own internal logic.

AP