Bitcoin Price: Why It's Down and Where It Goes From Here

 Bitcoin and other cryptos had a pretty tough couple of days, but why was there a sell-off and where do they go from here?

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From Bitcoin's peak of nearly $65,000, it dropped as much as 50% to almost $30,000. It has since stabilized around the $40,000 mark, still an over 35% drop from its all-time high.

The causes of this selloff are varied. Some have placed most of the blame on Elon Musk and Tesla's move to stop accepting Bitcoin for its vehicles, but there's more to it than that. 

Tax Day

Tax day has historically caused brief down markets as people withdraw money from investments to pay due taxes. 

While this is certainly not the only thing responsible for the almost $1 trillion that was wiped out of the cryptocurrency market from its all-time high, it likely contributed to the drop to a degree. 

According to a report from the data analytics firm Kensho, the S&P 500 is down 0.2% in the first two weeks of April on average. The following two weeks see a 1.7% increase on average.

This year was a bit different given that the deadline for taxes was May 17 due to the pandemic. Since the 17th, the S&P 500 has dropped as much as 2.6% and has started to rebound. 

With how volatile the crypto markets typically are, tax day could have had a more prominent effect than it would on traditional markets. 

In 2020 tax day fell on July 15 from delays due to the pandemic. On that date, Bitcoin dropped about 7.5% and later recovered.  

Elon Musk and Tesla

When there are major sell-offs in the crypto markets there is usually a lot of confusion, frustration and finger-pointing. This time, the finger was pointing at Elon Musk and Tesla.

Musk has had an interesting history with Bitcoin and crypto in general, but his stance has been overwhelmingly positive.

Musk unexpectedly announced via Twitter that Tesla would suspend Bitcoin as payment for its cars, citing environmental concerns with energy use from Bitcoin mining.

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This tweet, along with a flurry of confusion, frustration and anger that followed it, was likely a large cause for the turn in the market. 

Musk's announcement went out at 6:00 P.M. on May 12th. Bitcoin's price subsequently dropped from approximately $55,000 all the way down to under $31,000 over the course of the week.

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While Tesla still held a very large amount of Bitcoin on its balance sheet, the market's reaction to the company suspending payments was strong. Tesla had only paused its Bitcoin payments but many took this as a sign that Tesla was entirely ditching Bitcoin. 

As the news spread, and the theories and rumors that Tesla would sell its Bitcoin holdings moved throughout social, so did fear and doubt. This, along with other factors compounded the market's drop.

Traditional Market Selloff

Bitcoin and cryptocurrencies were not the only markets hurting over the last couple of weeks. In early May SPY, an ETF that tracks the S&P 500, reached a new all-time high of over $422. 

Since then, SPY has been volatile, dropping as much as 4.14% and down to $400. This is small in comparison to Bitcoin's movements, but traditional stock market indices are generally steady and a 4% drop can represent a rather large move.

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In a similar fashion the QQQ ETF, which tracks the top 100 companies in the Nasdaq, experienced an all-time high in mid-April and has since been dropping.

Most of the major indices have experienced similar drops, signaling a weakening overall market. 

One reason for the traditional markets decline could be due to inflation and the increase in the price of everyday goods and services. With the stimulus bills and increased government spending, the fresh supply of money in the market has pushed the rate of inflation to over 4%.

© Provided by Crypto on The Street https://ycharts.com/indicators/us_inflation_rate

As the purchasing power of the dollar decreases from an oversupply, prices of everyday items tend to increase. This can lead people to take money out of investments to pay for such items.

In economic downturns and times of high inflation, people prioritize their daily needs over investments. Instead of investing in stocks, indices or even Bitcoin, people buy groceries and pay their rent.

Where It Goes From Here

The most common way that Bitcoin's price is predicted is by using the stock-to-flow ratio. This means the currently available supply, or amount of Bitcoin currently in the market, divided by the supply being generated, or amount of Bitcoin generated through mining. 

If the available supply is mostly sitting in wallets, and the number of incoming Bitcoin decreases, then supply and demand would, in theory, push its price higher. While this does not account for unpredictable external moments like Elon Musk's tweets, political movements or cultural shifts, it has been relatively accurate thus far. 

Every four years the reward given to miners for processing transactions is cut in half. This is commonly referred to as the halving or halvening. This reduces the flow of new Bitcoin into the market, therefore doubling its stock-to-flow ratio. This reward to miners is reduced by half every four years until all 21 million Bitcoin are released into the market. 

From there, miners will be compensated with transaction fees to continue doing their job. In theory, as the stock to flow ratio increases, so will the price of Bitcoin, which means miners are still incentivized even though they are earning fewer Bitcoins.

© Provided by Crypto on The Street https://stats.buybitcoinworldwide.com/stock-to-flow/

In the chart above, each halving moment is shown by the jump in the blue line, which represents Bitcoin's stock-to-flow ratio over time. For each halving that has occurred so far in Bitcoin's 12-year history, its price has seen significant jumps as the rate at which new Bitcoins enter the market decreases. 

While this has proven accurate so far, existing trends do not always indicate what will happen in the future. Social shifts, political movements and regulatory change all have the potential to disrupt any trend. In the case of Tesla and Bitcoin, environmental concerns over the emissions caused by Bitcoin mining could have derailed Bitcoin from its stock-to-flow trend. 

While it's possible that these things could take Bitcoin of its stock-to-flow trend, Bitcoin has already survived 12 years of market pressures. If Bitcoin were to continue on its trajectory with its stock-to-flow ratio, Bitcoin could reach as much as $100,000 per coin by the late summer or early fall.