The cryptocurrency bitcoin, which saw an astonishing rise last year, has lost more than half of its value over the past six months.
Since ratcheting up to more than $ 64,000 in November, the price of one bitcoin has now fallen more than 50 percent. On Friday, it traded around $ 30,000, after falling as low as $ 26,000 earlier in the week.
The sale is partly linked to rising interest rates and inflation, which is at 40-year highs, which has caused the broader stock market to chatter. But the extent of the decline in bitcoin may come as a shock – especially for some investors who bought bitcoin during the recent price run.
A number of online stories, some of which have been repeated in mainstream business publications, had proclaimed bitcoin to be unbound to the traditional investment markets, and even to be a reliable hedge against the kind of inflation the United States and other parts of the world are. experiencing now.
But this week̵[ads1]7;s bitcoin sales came amid a major market downturn – which seems to disprove the notion that bitcoin is shielded from conventional market pressure, analysts say.
“It was a story, but it’s not true,” said Damanick Dantes, an investor and crypto-market analyst at cryptocurrency site CoinDesk.
Instead, Dante said, bitcoin’s price path looks more like volatile technology stocks for companies that often operate at a loss despite high growth.
In other words, investing in bitcoin these days is no different than investing in a technology company that may have a lot of potential, but whose short-term value is no longer clear.
Growth in these assets, Dante said, is usually driven by what he called investors’ over-risk budgets – which are often correlated with low-interest-rate environments. Given that interest rates have risen and investors’ risk appetite is declining, he said, bitcoin sales are not surprising.
“Investors and traders are now looking for stability, for high-quality areas of value,” he said. “It’s the opposite of an asset like bitcoin.”
The price of bitcoin rose in the midst of the pandemic, rising from around $ 10,000 in September 2020 to more than $ 60,000 in March 2021. The increase was partly driven by headlines indicating increased purchases by increasingly large companies, including Tesla, as of February 2021. announced it had bought $ 1.5 billion in bitcoin.
Yet by July 2021, bitcoin had plummeted to around $ 31,000. The decline followed an announcement in May that China had banned its financial and payment institutions from offering cryptocurrency services. In September, China had issued a general ban on all crypto transactions and mining in the country.
Soon after, bitcoin began to rise again. The year 2021 also saw the emergence of the so-called “meme” shares such as GameStop and AMC. Analysts say that the price of bitcoin is now most correlated with these types of high-risk high-reward stocks. GameStop shares peaked at $ 325 in January 2021, falling around 70 percent to $ 98 at the close of trading on Friday. AMC, meanwhile, has fallen around 80 percent from $ 59 in June 2021 to $ 11 on Friday.
“These are the same traders – the same investors,” said Don Kaufman, co-founder of the trading training platform TheoTrade and a trader. “It’s bitcoin, NASDAQ, meme stocks.”
For many investors, bitcoin’s fantastic run-up to 2021 was too much to resist.
According to a survey published in December by the crypto company Grayscale Investments LLC, more than half of the investors at the time had bought into bitcoin in the last 12 months alone. The survey was first reported by Bloomberg.
As a sign of how widespread the use of bitcoin had become, the financial services group Fidelity announced in April that they would start giving pension managers the opportunity to invest workers’ pension savings in bitcoin.
The announcement came despite guidance issued in March by the U.S. Department of Labor that warned pension fund leaders to “exercise extreme caution before considering adding a cryptocurrency alternative to a 401 (k) plan investment menu for plan makers.”
In an interview with NBC News, Ali Khawar, assistant secretary of the US Department of Labor, said that caution still applies.
“We’ve seen a lot out there that say, ‘This is the next sure thing’ – with an element of ‘Come in on the first floor, or you’ll regret it,’ ‘Khawar said.’ What you do not often hear is the other side. of the equation: That this is a relatively young asset class, with many difficult questions that are not answered, such as how it is valued, or how it is stored. “
The future prospects
But if bitcoin is not a sure thing when it comes to immediate return on investment, many investors still believe it is the next big thing for technology, said Ed Moya, senior market analyst at currency group OANDA. He compared the recent sale of cryptocurrency with the dot-com bubble that burst. While both may have been necessary to eliminate “foam” in their respective markets, the underlying technologies remain viable, he said.
“Bitcoin gives 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 provides an alternative 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 exactly when the effort on that ecosystem will pay off is now an open question. Meanwhile, bitcoin holders – especially those newer to the market – are making huge losses. According to data reported by Bloomberg, short-term bitcoin holders bought into the digital currency at an average price of $ 47,500 – which means they are now in the red.
The notion that bitcoin should be considered a risk asset correlated with some of the more advanced names in technology was repeated this week by Coinbase, one of the largest cryptocurrency brokers. Coinbase has seen its shares plunge nearly 80 percent from a peak of $ 323 in November 2021 to around $ 68 – including a fall of about 20 percent on Wednesday.
“We see a declining market for growth technology stocks and risk assets,” said Coinbase CEO Brian Armstrong during the company’s recent earnings interview. “And of course, Coinbase and crypto are no exception.”
And like the more volatile technology stocks, bitcoin is proving to be very sensitive to interest rates. When money is more expensive to borrow, investors are less likely to invest in more risky games in the future such as bitcoin. So when interest rates rise, the price of bitcoin is more likely to fall.
Dantes of CoinDesk said that bitcoin prices also fell in 2014 and 2018 amid a less accommodating monetary stance from the Federal Reserve.
“We are now in a moment of high inflation and tighter monetary policy, so we expect lower returns for all assets going forward,” he said. “And if we have lower returns on traditional assets, we’ll see extremely low returns on speculative assets.”