Why Cryptocurrency Fell at the End of 2021

On December 31, 2021, Bitcoin (BTC) fell below $46,000, though it had bounced around earlier in the day. It hit a low of just $45,933 at one point. Where Bitcoin leads, other tokens often follow, and this held on the 31st. While the decline of alt-coins helped the market to end the year on a down note, investors looking at the larger picture had reason for optimism as they made gains in this volatile space for the year as a whole. While Bitcoin fell almost 3% on the day, popular coins such as Ethereum (ETH), Binance Coin (BNB) and Solana (SOL) also fell more than 2%. Cardano (ADA) fell more than 4%. Many smaller cap coins were particularly hit hard. Overall, the decline in the price of cryptocurrencies led to a $100 billion drop in the total market capitalization, which went from a $2.4 trillion to a $2.27 trillion total value. This decline came in the wake of a small relief rally earlier in the day. Many analysts have tied this market response to options expiring at the end of the month. What is worrying to many investors is that the annual return on Bitcoin was less than 60% for the year. Compared to prior bull markets in crypto, this was a fairly tepid gain for the market leader in the crypto space. One possible explanation for this end-of-year price correction might be the entry of novice investors who are entering the market without a broad understanding of the space. While long term holders continue to HODL, newbies are more likely to try to make quick profits. One way to gauge the difference between the veteran investors vs. the more recent ones – the long-term holders have an average cost basis of less than $18,000 vs. almost $34,000 for newer entrants into the market. Another development that may be affecting gains is the influx of institutional money into the crypto space. This was not a factor during prior crypto bull markets and investors are still trying to adjust to this novel development.