The cryptocurrency bitcoin, which posted astonishing gains last year, has lost more than half of its value in the past six months.
Since rising to over $64,000 in November, the price of one bitcoin has now fallen more than 50 percent. On Friday it was trading around $30,000, after falling to $26,000 earlier in the week.
The sell-off is linked in part to rising interest rates and inflation that is at a 40-year high, shaking the broader stock market. But the magnitude of bitcoin’s decline may come as a shock — especially to some investors who bought bitcoin during its most recent price run.
A host of online stories, some of which have been reflected in mainstream business publications, had stated that bitcoin was not connected to the traditional investment markets, even being a reliable hedge against the kind of inflation that the US and other parts of the world are. experience now.
But this week’s bitcoin sell-off came amid a broader market downturn — something that appears to refute the idea that bitcoin is shielded from conventional market pressures, analysts say.
“That was a story, but it’s not true,” said Damanick Dantes, an investor and crypto market analyst at the cryptocurrency website CoinDesk.
Instead, Dantes said, bitcoin’s price trajectory is more like that of volatile technology stocks for companies that often operate at a loss despite high growth.
In other words, betting on bitcoin today is no different than betting on a technology company that could have a lot of potential, but whose short-term value is no longer apparent.
The growth of those assets, Dantes said, is mostly fueled by what he termed investors’ excessive risk budgets — often associated with low-interest environments. Given that interest rates have risen and investors’ risk appetite is declining, he said, bitcoin’s sell-off is not surprising.
“Investors and traders are now looking for stability, for high-value areas,” he said. “That’s the opposite of an asset like bitcoin.”
The price of bitcoin surged during the pandemic, rising from about $10,000 in September 2020 to more than $60,000 in March 2021. The surge was driven in part by headlines indicating that increasingly larger companies, including Tesla, are buying more. it had bought $1.5 billion worth of bitcoin.
But by July 2021, bitcoin had fallen in price to about $31,000. The drop followed an announcement in May that China had banned its financial and payment institutions from offering cryptocurrency services. By September, China had issued a blanket ban on all crypto transactions and mining in the country.
Shortly after, bitcoin started to rise again. The year 2021 also saw the rise of the so-called “meme” stocks such as GameStop and AMC. Analysts say bitcoin price is now most strongly correlated with those types of high-risk, high-reward stocks. GameStop shares peaked at $325 in January 2021 and are down about 70 percent to $98 at the close of markets on Friday. AMC, meanwhile, is down about 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 trading professional. “It’s bitcoin, NASDAQ, meme stocks.”
Warnings to be careful
For many investors, bitcoin’s stunning 2021 run was too much to resist.
According to a survey released in December by crypto firm Grayscale Investments LLC, more than half of then-existing investors had only bought bitcoin within the past 12 months. The research was first reported by Bloomberg.
In a sign of how widespread bitcoin adoption had become, financial services group Fidelity announced in April that it would give pension managers the ability to invest employees’ retirement savings in bitcoin.
The announcement came despite guidelines issued in March by the U.S. Department of Labor warning retirement plan administrators to “use extreme care before considering adding a cryptocurrency option to the investment menu of a 401(k) plan.” for plan participants.”
In an interview with NBC News, Ali Khawar, deputy secretary of the US Department of Labor, said caution is still warranted.
“We heard a lot there saying, ‘This is for sure next time’ – with an element of ‘Get on the ground floor or you’ll regret it,’” Khawar said. “What you don’t often hear is the other side of the equation: that this is a relatively young asset class, with a lot of difficult questions that go unanswered, such as how it is valued or how it is stored.”
The future prospects
But if bitcoin is uncertain when it comes to immediate returns on investment, many investors still believe it is the next big step for technology, said Ed Moya, senior market analyst at foreign exchange group OANDA. He compared the recent cryptocurrency sell-off to the bursting of the dotcom bubble. While both may have been necessary to eliminate “foam” in their respective markets, the underlying technologies remain viable, he said.
“Bitcoin offers investors exposure to 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 represents an alternative option for investors.”
While it is now clear that bitcoin is not an inflation hedge or safe haven, he said, “For many people, it will provide long-term value. The ecosystem will provide the next wave of innovation.”
But when exactly the bets on that ecosystem will pay off is now an open question. In the meantime, bitcoin holders – especially those new to the market – are taking heavy losses. According to data reported by Bloomberg, short-term bitcoin holders bought the digital currency at an average price of $47,500, meaning they are now firmly in the red.
The idea that bitcoin should be considered a risk asset associated with some of the sharper names in technology was echoed this week by Coinbase, one of the largest cryptocurrency brokers. Coinbase saw its shares plunge nearly 80 percent from a high of $323 in November 2021 to about $68 — including a drop of about 20 percent Wednesday.
“We are seeing a downward market for growth technology stocks and risky assets,” Coinbase CEO Brian Armstrong said during the company’s most recent earnings call. “And of course Coinbase and crypto are no exception.”
And like those more volatile technology stocks, bitcoin proves to be highly sensitive to interest rates. When money is more expensive to borrow, investors are less likely to invest in riskier bets on the future, such as bitcoin. So if interest rates rise, the price of bitcoin is more likely to fall.
CoinDesk’s Dantes said bitcoin prices also fell in 2014 and 2018 amid less accommodative monetary policy from the Federal Reserve.
“We are now in a time of high inflation and monetary policy tightening, so we expect lower returns for all assets going forward,” he said. “And if we have lower returns on traditional assets, we’re going to see extremely low returns for speculative assets.”