Is it wise to buy Bitcoin?

Summary

• A big part of Bitcoin’s post-May decline has been majorly influenced by China’s crackdown on bitcoin trading and mining.
• A decision by Chinese authorities to shut down Bitcoin mines in Beijing and Sichuan was closely followed by a fall in bitcoin’s price as it dropped to US$31,760 on Monday, marking the first drop below US$32,000 since 8 June.
• Although bitcoin has experienced wild fluctuations this year, it has risen 350% in the past twelve months.
• Investing in Bitcoin can be a smart move if the investor is aware of the volatility involved and does not panic and make rash decisions when there is a sudden dip.

Bitcoin has experienced a roller coaster of ups and downs in 2021. Recent events across the globe have caused the world’s largest digital currency to fluctuate heavily, leading investors to question its future vitality.

Despite its most recent correction, Bitcoin has grown by approximately 350% in the past twelve months. According to CoinDesk, bitcoin’s price this time last year was US$9,311. Today, it sits at US$32,404.

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Bitcoin is still the world’s largest cryptocurrency, with a current market value of ~US$615 billion. The digital currency hit a record high in mid-April of just above US$63,000 but yesterday sunk below US$30,000 on the back of a crackdown on bitcoin mining in China. It has since recovered to US$32,801, where it sits today.

Does the world’s most famous crypto have further to fall? Is it wise to buy bitcoin?

Let us examine this.

Bitcoin’s fall since May 2021

Everything that goes up must come down. While perhaps not always true, it certainly applied to bitcoin earlier this year when the coin shed approximately half its value in mid-May.

It has been reported that a big part of Bitcoin’s post-May decline has been majorly influenced by China’s crackdown on both bitcoin trading and bitcoin mining.

Bitcoin Mining (Source: © Arinahabich08 | Megapixl.com)

When the University of Cambridge's Centre for Alternative Finance found that China contained 65% of the world’s bitcoin miners, China decided it was time to curb the energy-consuming process of bitcoin mining to combat climate change.

As a result, the Chinese government forced the shutdown of a slew of mines in Beijing. Moreover, the closure of 26 mines in the Sichuan province was ordered last week.

This decision by Chinese authorities was closely followed a fall in bitcoin’s price as it dropped to US$31,760 on Monday, marking the first drop below US$32,000 since 8 June.

Bitcoin’s environmental impact

Bitcoin mining and its attributed high energy consumption were brought to light in May, when Tesla (NASDAQ:TSLA) Chief Executive, Elon Musk, announced that Tesla would no longer accept the digital currency as payment for Tesla vehicles. Musk cited his reasoning in a tweet, saying that bitcoin mining’s excessive use of fossil fuels was the reason for the electric car company’s separation from bitcoin.

Source: Copyright © 2021 Kalkine Media

This move by Musk resulted in a 12% fall in bitcoin’s price.

Musk later said that the environmental concerns posed by bitcoin mining could be addressed by having audits of renewable energy used by its miners.

Musk’s suggestion came a week after Ark Investment claimed 76% of Bitcoin Miners used renewable energy.

RELATED: Elon Musk Calls for Renewable Energy Audits by Bitcoin Miners

China’s crackdown on Bitcoin trading

As well as Bitcoin’s mining woes in Chin, the Chinese government has also sought to regulate the trade of bitcoin, further adding pressure to the digital currency’s downward price trend.

On 18 May, three Chinese authorities vowed to clamp down on financial institutions dealing in cryptocurrency. They claimed that cryptocurrency had no intrinsic value and was easily subjected to market manipulation. This resulted in an immediate 7.6% price slump for bitcoin.

RELATED: Chinese ban adds to Bitcoin’s woes, price sinks 8%

The Death Cross

Another bearish signal for the coin being waived by experts is the death cross to add to the pressure being applied to bitcoin by the Chinese government.  The death cross is a technical pattern, which occurs when the 50-day moving average of a crypto stock crosses below the 200-day average. This pattern indicates the strong possibility of a major sell-off.

A death cross already appeared last Saturday, resulting in a drop of 14% on Monday.

With the ongoing pressure from the Chinese government, experts predict a  further decline in bitcoin’s price in the future.

Source: © Elnur | Megapixl.com

So, is Bitcoin a smart investment?

Investors should be aware that, at the best of times, bitcoin, and cryptocurrencies in general, are volatile investments and investors can potentially lose a vast amount of money in a blink of an eye. Therefore, investors should only invest what they are prepared to lose.

Experts advise that no more than 5% of an investor’s portfolio should be tied up in cryptocurrency. Furthermore, if an investor chooses to put money into crypto, they should ensure they have an otherwise healthy portfolio.

If an investor chooses Bitcoin, they should not allow the volatility of the market to dictate their decisions to buy or sell. Instead, it is best to approach Bitcoin with a long-term mindset.

Although bitcoin has experienced wild fluctuations this year, as mentioned at the beginning of this article, it has risen 350% in the past twelve months.

Therefore, investors who choose Bitcoin need not panic when the inevitable sharp rises and falls occur. Although sharp falls may be on the horizon, historically, bitcoin’s price rises in the long term.