What makes Bitcoin’s price go down?

• Bitcoin is a highly volatile asset, meaning prices can fluctuate dramatically over a short period of time.

• Factors that may drive Bitcoin’s price down include public attention (or lack thereof), regulatory concerns, macroeconomic conditions, “black swan” events and more.

• Understanding how these catalysts can negatively affect prices can help traders better understand the dynamic Bitcoin market.

Bitcoin’s price is driven by how the market values its functionality. 

In economics, price comes from a relationship between supply and demand. As the amount of an asset that exists (supply) changes and the amount of people looking to purchase that asset (demand) changes, the price of the asset also changes to reflect this relationship.

But, it is important to remember that Bitcoin has a clearly defined and unchangeable maximum supply of 21 million coins that will ever exist. You can learn more about this fixed supply and the significance of it to bitcoin in our Kraken Learn Center article, How many bitcoin are there?

Because bitcoin’s supply is clearly defined, most changes in Bitcoin’s price are largely driven by changes in demand for Bitcoin and the functionality it offers.

During times when there is a lower demand for the functionality that Bitcoin offers, its price can decrease. However, it’s important to remember that the opposite is also true.

You can learn more about the factors that can contribute to an increase in the price of bitcoin in our article, What makes Bitcoin’s price go up?

Taking a closer look at the various factors that can contribute to a decrease in demand for Bitcoin in the first place can help demystify why Bitcoin’s price may decrease.

Discussions on various social networks like X or YouTube can be a useful tool for gauging public sentiment surrounding Bitcoin and the crypto industry.

While the Bitcoin market is now big enough that it’s difficult for any single trader to significantly affect its price, social media can still help amplify individual opinions and influence the outlook of the wider community.

In some instances, these messages may alter general market sentiment and motivate those that have a low demand for Bitcoin in their life to sell their BTC.

“FUD,” short for “fear, uncertainty, and doubt,” is commonly used in the cryptocurrency community to describe this effect. 

Across social media, many have argued that Bitcoin wastes energy and accelerates climate change. Meanwhile, others assert that Bitcoin mining helps to combat the problem. Regardless of which side is right or wrong, these sorts of widespread discussions have historically been followed by a decrease in demand for Bitcoin, which has caused its price to fall.

On May 12, 2021, Elon Musk tweeted that Tesla would no longer accept Bitcoin as payment for automobiles due to the carbon emissions associated with Bitcoin mining. That day, the price of BTC fell by more than 12%, and would decline by a further 40% over the following week.

Elon Musk confirmed that the pivot was due to Bitcoin’s perceived environmental impact. While multiple factors were at play, many feel this tweet contributed to a change in market sentiment, which altered demand for bitcoin and helped contribute to a decrease in price.

Bitcoin has existed in a complex and ever changing global regulatory environment for many years. 

Some nations have embraced Bitcoin as a revolutionary technology that will drive prosperity. Others have cut off access to it completely. Many more have either taken no official stance or are still developing a viable framework that balances investor protections, while still encouraging innovation.

Several countries have enacted adverse regulatory action against cryptocurrency, including temporary bans, issued warnings and outright bans. After some of these decisions had been made public, Bitcoin’s price fell in the short term.

China

China stands as one of the more notable nations that has had a major impact on bitcoin prices through its regulatory changes. Over the years, it has announced multiple crackdowns and nationwide bans on Bitcoin trading and mining, which significantly hurt Bitcoin’s price. 

In January 2018, the Chinese government ordered all of its country’s banks to cease all services directed toward cryptocurrency-related companies. The announcement came just a few short weeks after BTC’s price had topped out, pouring further pressure on holders to sell. After the announcement, BTC’s price fell 50% over the following three weeks.

China rattled the market again in June 2019, declaring cryptocurrency trading illegal. BTC’s price had been strong in the first half of 2019, but shortly after this announcement, prices began to reverse. By the end of the year, BTC prices had fallen by more than 40%.

As the world's most populated country, regulatory changes in China have historically contributed to global shifts in the price of bitcoin.

United States

The United States government is another example of a regulatory powerhouse that wields significant power over the crypto market due to its dominant economic status. The majority of the world’s largest and most profitable companies were founded and are still based in the United States. 

In 2018, the country’s Department of Justice (DOJ) launched a criminal probe into Bitcoin market manipulation. Prices subsequently dropped 6% shortly after the investigation as demand for Bitcoin decreased.

In November of the same year, the DOJ extended its probe to investigate allegations of Tether manipulating BTC prices during the 2017 bull market. This event, along with other market factors contributed to prices falling a further 30% over the following 24 days.

While the Bitcoin network is decentralized and accessible to all, governments can still target companies that make accessing the network easier. When these sorts of events have happened in the past, the market has oftentimes reacted in a way that decreases the price of bitcoin.

Many traders use technical analysis to gain insights into the possible future price movements of bitcoin and other assets. These methods rely on patterns and structures informed by math and psychology to time trades and predict outcomes, with varying degrees of success. 

A death cross is an example of a chart pattern that some traders look for when deciding whether or not an asset has entered into a bear market. While not always reliable, some believe that this indicator used in conjunction with others can potentially lend clues to traders who are looking to make better-informed trading decisions. 

Another example of a trading event that can negatively impact bitcoin prices are long squeezes in the crypto futures market. Traders will often use futures contracts to gain exposure to Bitcoin’s price movements, oftentimes using leverage. Certain trading events, like long squeezes, can impact Bitcoin’s short-term price. 

A long squeeze occurs when a sudden and dramatic price fall causes a widespread margin call and liquidation of long trades. The downward price trajectory causes traders to sell their BTC holdings in an effort to avoid further losses. These liquidations have caused as much as $10 billion worth of Bitcoin to be sold in a day. 

Sometimes, liquidations can drive bitcoin prices down enough to trigger a cascade of liquidations at lower levels. This process can thereby cause Bitcoin’s price to drop sharply within a very short time period.

Another trading-related demand driver for BTC is the perception of its historical price patterns and trends. When traders notice a repeat of events or patterns that took place before Bitcoin price rallies in the past, they may increase demand for Bitcoin and drive the price higher as a  result.

Technical analysis is commonly used in capital markets to try and predict future price movements based on current trends. When various bullish chart patterns form on the BTC chart, particularly over longer time frames, it can cause excitement to spread among prospective Bitcoin buyers. This anticipation may lead to increased demand and a positive breakout to higher prices.

Golden crosses are a popular bullish chart pattern that can often induce excitement and anticipation of an improving market. Since 2013, ten golden crosses have appeared on the daily BTC price chart. Of those ten, seven golden crosses (70%) have been followed by a bull market.

Predicting how the price will react to any news in the future shouldn’t be your sole factor in any trading decision. The market for BTC, and crypto in general, is still in its early years and subject to regular volatility. There’s never any guarantee that the price will react to an event the same way as it did in the past.

Although bitcoin's price can be volatile, understanding the factors that influence these price changes can help prepare you fas you get started in the digital asset economy.

With a clearer understanding of the major catalysts that can impact Bitcoin’s price, are you now ready to get started with as little as $10? 

Kraken makes it easy to purchase Bitcoin and 200+ other cryptocurrencies.

Sign up for your free account today!