Why Is Bitcoin Down Today?

The price of Bitcoin (BTC) fell to a two-month low over recent days, down 7% on the week thanks to ongoing worries about crypto market liquidity. The world’s largest cryptocurrency by market cap is now trading below $27,000 for the first time since March.

Reportedly institutional traders are pulling their money out of Bitcoin and other cryptocurrencies due to both regulatory and liquidity concerns.

Recent liquidity concerns in Bitcoin even caused crypto exchange Binance to pause BTC withdrawals twice earlier this week.

Although Binance blamed the pause in withdrawals on “network congestion,” some crypto insiders have theorized there may be more to the issue. These insiders cite large movements of Bitcoin on Binance’s ledgers, which could be signs of legal risks or insolvency.

Bitcoin is not the only cryptocurrency suffering right now. Regulatory and inflationary fears have caused the prices of other leading cryptocurrencies to fall as well.

Ethereum (ETH), the world’s second-largest cryptocurrency by market cap, is down more than 5% week to date. Altcoin Solana (SOL) has seen more than a 6% pullback over the course of the week.

Why Did Binance Pause Bitcoin Withdrawals?

Binance froze withdrawals of Bitcoin twice this week due to “congestion” on the cryptocurrency’s blockchain.

A blockchain is where all of the transactions for a given cryptocurrency are recorded. Congestion on Bitcoin’s blockchain has reportedly come from a growing volume of transactions in so-called “meme coins.” These cryptos can piggyback on the original blockchain and lead to higher transaction fees.

Due to the added volume on Bitcoin’s blockchain, Bitcoin miners, the people who verify transactions on the blockchain, started charging higher transaction fees, and crypto exchanges’ withdrawal fees couldn’t keep pace. This led to a slowdown in processing times for exchanges like Binance, hence the “congestion” to which the exchange referred.

Reportedly Binance froze Bitcoin withdrawals to provide miners with extra time to catch up with a backlog of transactions.

Binance first paused withdrawals on Sunday afternoon for around 90 minutes. The exchange later paused withdrawals again early Monday morning for an additional two hours.

What Caused BTC’s Network Congestion?

Earlier this year, a Bitcoin developer released a new protocol, known as Ordinals, that allowed for the minting of non-fungible tokens on the Bitcoin network. This same protocol also gives developers the ability to mint meme coins such as the new Pepe Coin (PEPE) on the network.

The ability to add NFTs and meme coins to the Bitcoin network has increased the number of transactions on the cryptocurrency’s underlying blockchain. This increase in transactions was not something for which Bitcoin’s miners were prepared.

As a result, the network has slowed down due to an increase in processing transactions. This increase in processing times has also caused the fees charged by Bitcoin miners to go up. Crypto exchanges’ withdrawal fees have not kept pace.

Unlike other blockchain networks, such as Ethereum, Bitcoin was not originally designed to handle this kind of uptick in transactions. BTC was developed as a medium for payments and store of value.

Is There More to the Story?

Not all experts believe Binance’s claim that the sole reason for shutting down withdrawals is due to network congestion, however.

Some crypto insiders have pointed to Binance moving approximately $4.4 billion in BTC across its crypto wallet system. These insiders have pointed out that this could be a sign of insolvency or legal risk.

For its part, Binance claims that this move is merely an attempt to secure the company’s BTC in offline (cold) storage wallets rather than online (hot) wallets.

Since there is no way for outside parties to access offline wallets via the internet, cold storage is usually considered to be a more secure method for holding cryptocurrency. However, this also means that Binance customers can no longer withdraw these coins from the exchange.

For this reason, Nico Moran, creator and host of Simply Bitcoin, recommends that everybody who owns BTC transfer their currency offline immediately.

“The lesson always remains the same. If you’re not taking self-custody of your Bitcoin, it’s not your Bitcoin,” Moran says.

Is Cryptocurrency a Safe Investment?

Cryptocurrency markets remain mired in the crypto winter despite a modest bounce higher in prices this year. The rapid collapse of crypto exchange FTX, Binance’s top competitor, in November 2022 brought unwanted scrutiny to the industry.

U.S. regulators have cracked down on exchanges and other companies trading in and creating cryptocurrencies.

Most recently SEC commissioner, Gary Gensler, has claimed that his agency believes most cryptocurrencies are in fact securities and hence already fall under the purview of a plethora of already-existing legal precedents.

Gensler has also stated that Bitcoin itself is probably a commodity—not a security—and hence should be regulated by the Commodity Futures Trading Commission (CFTC), not the SEC.

These fears of regulations have led to everything from bank insolvencies, such as the case of Silvergate Bank, to U.S.-based crypto exchanges like Coinbase moving some operations overseas.

“Right now, you have lawsuits flying against Binance and Coinbase,” Moran says. “Binance is a black box. We have no idea what’s going on there. If you choose to leave your coins there, you do so at your own risk.”

Even after the recent price declines, Bitcoin is up nearly 60% year-to-date. Although BTC’s current price of $26,500 is still more than 58% below its all-time high of $64,400, set in November 2021.