Bitcoin: these risks weighing on the price of cryptocurrency in 2022

Bitcoin fell below $40,000 on Monday January 10, its lowest level since the end of September 2021. The first cryptocurrency in terms of capitalization is suffering from investor fears linked to the evolution of the monetary policies of central banks, in particular the Federal Reserve. (Fed) in the United States. It thus follows the general trend of the stock markets, down sharply on Monday.

To curb high inflation across the Atlantic, the Fed intends to raise its key rates and reduce its balance sheet in 2022. In other words, the institution intends to reduce its purchases of debt securities, which will have the effect of reducing the quantity of liquidity. injected into the markets. However, the abundance of liquidity fueled the sharp rise in the stock markets in 2021 and also benefited cryptocurrencies.

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“We observe a correlation between the rise of the crypto market and the injections of liquidity in recent years”, underlines Nicolas Chéron, strategist at Zone Bourse. If central banks start cutting off the tap, cryptocurrencies could suffer, like equities, from turbulence.

Still, not all central banks are going to put an end to their accommodative policies all at once. The European Central Bank is unlikely to go at the same pace as the Fed, while the Chinese central bank is instead following an opposite path, injecting more liquidity. “Liquidity will remain high in 2022”, agrees Nicolas Chéron.

High volatility inherent in bitcoin

The evolution of monetary policies should encourage price volatility. And bitcoin should not be spared, especially since volatility is already “an inherent risk in cryptocurrency”, according to Nicolas Chéron. “Since 2013, it has experienced several corrections of more than 50%, and up to 80%,” he adds. Between the high point of November 10 – the cryptocurrency was then trading for the record amount of $69,000 per unit – and the recent low point, bitcoin suffered a correction of 42%.

“This is a legitimate correction of an extremely bullish long-term and volatile asset,” the analyst said. For eight years, bitcoin has been the best performing asset. Its hyper volatility weighs on its price but also offers opportunities, investors being able to take advantage of moments of sharp declines to enter the market and buy cryptocurrency at a lower cost.

Estimating the true value of bitcoin remains very difficult. It is driven by investors’ expectations of the role it could play in the financial world and our economy. “Its valuation is based on long-term hopes. We go from euphoria to fear”, explains Nicolas Chéron. The price of bitcoin can therefore fall as quickly as it rises.

The regulation Damocles sword

Among the fears about the future of cryptocurrency, there are in particular the regulatory developments of the States. In 2021, bitcoin experienced strong corrections related to the restrictions imposed by China. Beijing initially banned financial institutions from offering services related to cryptocurrencies, before the country’s central bank simply decreed “illegal” any activity related to this type of asset.

China has also ended mining on its territory, a process that validates bitcoin transactions on blockchain technology, requiring a lot of computing power and a lot of energy.

It is very difficult to predict what the regulatory developments will be and what new restrictions could have a real negative impact on the price of bitcoin. But “there is always a regulatory sword of Damocles, likely to destabilize the prices of cryptocurrencies”, notes Nicolas Chéron.

According to a report published in November 2021 by the Law Library of Congress, the law library of the United States Congress, 51 countries ban cryptocurrencies on their territory.

Fall in the wake of tech stocks

Conversely, the adoption of bitcoin by new states, like El Salvador, which made it its official currency in 2021, can give a boost to the price of cryptocurrency. Similarly, if digital giants decide to facilitate its use, such as Amazon, which already recruited crypto experts last year, the value of bitcoin could soar.

Paypal’s announcement in the fall of 2020, for example, signaled the start of a sharp rise in the price. The American payment services giant then specified that it intended to open its network to cryptocurrencies.

If big tech companies can boost the price of bitcoin, they can also drag cryptocurrencies down, as has been the case in recent days. Bitcoin plunged in the wake of the Nasdaq market in the United States. A trend, if confirmed, which could harm the perception of bitcoin as a safe haven and means of protection against inflation.

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