The cryptocurrency Bitcoin, which saw spectacular gains last year, has lost more than half its value over the past six months.
Since the price of bitcoin rose to over $64,000 in November, it has now fallen by more than 50 percent. On Friday, it was traded around $30,000. After dropping to $26,000 earlier in the week.
The sell-off is partly related to higher interest rates and inflation hitting 40-year highs, reeling the broader stock market. But how low bitcoin has fallen may come as a shock – especially to some investors who bought bitcoin during the latest price spike.
A host of online narratives, some of which have been echoed in mainstream business publications, have declared that bitcoin is unrelated to traditional investment markets and even a trustworthy hedge against this kind of inflation in the United States and other parts of the world. witness now.
But the bitcoin sell-off this week came amid a broader market slump — something that appears to refute the notion that bitcoin is trapped by traditional market pressures, analysts say.
“This was a story, but it is not true,” said Damanik Dantes, investor and crypto market analyst at crypto site CoinDesk.
Instead, Dantes said, the trajectory of bitcoin’s price is very similar to that of volatile tech stocks of companies that often run losses despite high growth.
In other words, betting on bitcoin these days is no different than betting on a tech company that could have a lot of potential, but its short-term value is no longer apparent.
Dantes said growth in those assets has usually been driven by what he called excessive risk budgets for investors – often associated with low interest rate environments. Given that interest rates are rising and investors’ appetite for risk has waned, the bitcoin selloff is not surprising, he said.
“Investors and traders are now looking for stability for areas of high value,” he said. “This is the complete opposite of an asset like Bitcoin.”
The price of Bitcoin has soared amid the pandemic, rising from around $10,000 in September 2020 to more than $60,000 in March 2021. The rally was driven in part by headlines pointing to increased buying by bigger companies, including Tesla, which announced In February 2021 she bought $1.5 billion worth of Bitcoin.
However, by July 2021, the price of Bitcoin had dropped to around $31,000. The drop came on the heels of the May announcement that China had banned its financial and payment institutions from providing cryptocurrency services. By September, China issued a blanket ban on all cryptocurrency transactions and mining in the country.
Soon, bitcoin started to rise again. 2021 also saw the rise of so-called “meme” stocks such as GameStop and AMC. Analysts say the price of bitcoin is now closely correlated with those types of riskier stocks and their returns. GameStop shares hit a high of $325 in January 2021, and fell nearly 70 percent to $98 by market close Friday. Meanwhile, AMC is down nearly 80 percent from $59 in June 2021 to $11 on Friday.
They are the same traders – the same investors,” said Don Kaufman, co-founder of trading education platform TheoTrade and a specialist in trading. “It’s Bitcoin, Nasdaq, Meme Stock.”
Warnings to be careful
For many investors, the astonishing rise of Bitcoin in 2021 was too much to resist.
According to a survey released in December by crypto firm Grayscale Investments LLC, more than half of current investors at the time had only bought bitcoin in the past 12 months. The survey was first reported by Bloomberg.
In a sign of the widespread adoption of bitcoin, financial services group Fidelity announced in April that it would begin giving retirement managers the ability to invest workers’ retirement savings in bitcoin.
The announcement came despite guidance issued in March by cautionary retirement plan managers from the US Department of Labor to “use extreme caution before they consider adding a cryptocurrency option to a 401(k) plan investment list for plan participants.”
In an interview with NBC News, Ali Khawar, the US assistant secretary of labor, said caution remains.
“We’ve seen a lot say, ‘This is the next sure thing’—with the element of ‘Go into the ground floor or you’ll regret it,’” Khawar said. “What you don’t hear often is the other side of the equation: that this is a relatively recent asset class, with a lot From difficult unanswered questions, such as how it is evaluated, or how it is stored.”
Ed Moya, chief market analyst at foreign exchange group OANDA, said that if bitcoin is not a sure thing when it comes to immediate returns on investment, many investors still believe it will be the next big thing for the technology. Compare the recent cryptocurrency sale to the bursting of the dotcom bubble. While both may be necessary to eliminate the “foam” in their markets, the underlying techniques remain viable, he said.
“Bitcoin offers investors the opportunity to learn about the future of blockchain technology and the future of smart contracts,” Moya said. “And for many emerging markets struggling with their fiat currencies, it also presents an alternative option for investors.”
While it is now clear that bitcoin is not an inflation hedge or a safe haven asset, he said, “For many people, it will provide long-term value. Its ecosystem will provide the next wave of innovation.”
But when to pay off bets on this ecosystem is now an open question. Meanwhile, bitcoin owners – especially those new to the market – are incurring huge losses. According to data reported by Bloomberg, short-term bitcoin holders have bought the digital currency at an average price of $47,500 – which means they are now in the red.
The idea that bitcoin should be considered a risky asset tied to some of the more modern names in technology was echoed this week by Coinbase, one of the largest cryptocurrency brokers. Coinbase has seen its shares drop nearly 80 percent from $323 in November 2021 to about $68 — including a drop of nearly 20 percent on Wednesday.
“We’re seeing a market downturn for tech stocks and risky assets,” Coinbase CEO Brian Armstrong said during the company’s latest earnings call. “And of course, Coinbase and crypto are no exception to this.”
And like those more volatile technical stocks, bitcoin has proven to be very sensitive to interest rates. When it is more expensive to borrow money, investors are less likely to invest in riskier bets in the future such as Bitcoin. Therefore, as interest rates rise, the price of Bitcoin is likely to fall.
Dantes of CoinDesk said that bitcoin prices also fell in 2014 and 2018 amid a less accommodative monetary stance from the Federal Reserve.
“We are now in a moment of high inflation and monetary tightening, so we expect lower returns for all assets in the future,” he said. “And if we had lower returns on conventional assets, we would see very low returns on speculative assets.”