Why prices of crypto currencies are dropping
In the past few days, many crypto currencies have wiped off significant gains made since the beginning of the year renewing fears of the 2017 burst, where the price of bitcoin crashed from around $20,000 to below $3,500.
But experts say this time the price decline is different, as the market has stronger fundamentals and is coming into maturity on the back of institutional investments and growth in emerging market consumers.
“This bitcoin bull run is not just from institutions,” Marcus Swanepoel, CEO/ co-founder of Luno, a global crypto currency exchange with a significant presence in emerging markets like Nigeria and other African countries, says in a tweet. “Our (retail) volumes in South Africa, Malaysia, Nigeria, and Indonesia all trebled over last month and at all-time highs. Emerging market consumers are voting with their money and they’re ready for a better financial system,” Swanepoel notes.
More investors in the market mean renewed scrutiny into the workings of the very infrastructure that powers the market and how it is deployed. There are questions about environmental impact, use cases, illicit activity, and regulation.
Bitcoin, the most valuable crypto asset, has been the most affected with the price falling by over 30 percent from as high as $58,000 it recorded last week to around $ 36,000. It recovered on Wednesday towards $40,000 and settled around $40,229 on Thursday morning.
According to Chainalysis, the end-of-day bitcoin price has fallen by over 25 percent over seven days on four other occasions since the start of 2017. These were December 24, 2017, when the price fell from the $20,000 peak of the 2017 bull run; February 5, 2018, when the price fell below $10,000 as the bull run ended; November 25, 2018, when the price went to $4,000 as crypto winter set in, and Mid-march 2020, when the price fell as low as $4,000 as financial markets reacted to COVID-19.
Ethereum price, which surged to an all-time high of $4,308 about seven days ago, dropped to $2,200 on Wednesday before recovering above $2,800. As of press time, the price was at $2,684 on Thursday.
While the price fall at 30 percent is high, the price level of both Bitcoin and Ethereum is still significantly high at over $40,000 and $2,000 respectively. The price decline
Environmental impact
Long before Elon Musk and Tesla came along, there have been debates over the electricity consumption of bitcoin mining and the impact it has had on the environment and climate change.
It takes 10 minutes to mine one bitcoin. At 600 seconds (10 minutes), all things being equal, it will take 72,000GW (or 72 Terawatts) of power to mine a bitcoin using the average power usage provided by ASIC miners.
In explaining why it suspended bitcoin payments, Tesla said it was concerned about rapidly increasing use of fossil fuels for bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.
A report by the BBC in February found that the bitcoin network consumes 121.4TWH of power per year, which means that it would be the 29th highest energyconsuming country in the world, above Argentina and below Norway.
It is however important to also acknowledge that fiat currency printing and minting,
gold mining, and the banking system consume far more energy than bitcoin mining.
However, stakeholders in bitcoin mining and operations say the technology is built in such a way that it incentivises the use of clean power. This is because it is currently much cheaper than non-renewables, and in an industry with such significant financial rewards, this matters. Miners will always go wherever they can use the cheapest power, and they will move to those regions where power is cheapest.
A report by payment firm, Square, also explains that renewable sources typically produce excessive supply when demand is low. Conversely, they struggle to provide enough when demand is high. The Square report recommends
addressing divergent renewable production and demand for electricity by building an ecosystem “where solar/wind, batteries, and bitcoin mining co-exist to form a green grid that runs almost exclusively on renewable energy.”
Use cases
The use cases of crypto currencies remain a concern of many institutional investors. In the past, the most uses for bitcoin have been as a speculative asset - investors stake capital in hopes of trading for high capital.