Saturday, June 25 2022

The bitcoin cryptocurrency, which recorded stunning gains last year, has lost more than half of its value in the past six months.

Since hitting over $64,000 in November, the price of one bitcoin has now fallen over 50%. On Friday, it was trading around $30,000, after falling as low as $26,000 earlier in the week.

The selloff is tied in part to rising interest rates and inflation that is at 40-year highs, which sent the broader stock market tumbling. But the extent of bitcoin’s decline may come as a shock, especially to some investors who bought bitcoin during its last price surge.

A host of online stories, some of which have been featured in mainstream trade publicationshad proclaimed that bitcoin was not tied to traditional investment markets, and even that it was a trustworthy hedge against the kind of inflation that the United States and other parts of the world are currently experiencing.

But this week’s bitcoin selloff came amid a broader market downturn — something that appears to disprove the notion that bitcoin is immune to conventional market pressures, analysts say.

“It was a story, but it’s not true,” said Damanick Dantes, a crypto investor and market analyst at cryptocurrency website CoinDesk.

Instead, Dantes said, bitcoin’s price trajectory is more like that of volatile tech stocks for companies that often operate at a loss despite strong growth.

In other words, betting on bitcoin these days is no different than betting on a tech company that might have a lot of potential, but whose short-term value is no longer clear.

The growth of these assets, Dantes said, is typically fueled by what he calls investors’ excess risk budgets — which are often correlated with low interest rate environments. Given that interest rates have risen and investors’ appetite for risk has waned, he said, the bitcoin selloff is not surprising.

“Investors and traders are now looking for stable, high-quality areas of value,” he said. “It’s the complete opposite of an asset like bitcoin.”

Asset at risk

The price of bitcoin has skyrocketed amid the pandemic, rising from around $10,000 in September 2020 to over $60,000 in March 2021. The surge was partly driven by headlines that indicated increased buying by increasingly larger companies, including Tesla, which in February 2021 announced that it had bought $1.5 billion in bitcoins.

Yet, by July 2021, the price of bitcoin had dropped to around $31,000. The drop follows an announcement in May that China had banned its financial and payment institutions from providing cryptocurrency services. In September, China issued a blanket ban on all crypto transactions and mining in the country.

Soon after, bitcoin started rising again. 2021 has also seen the rise of so-called “meme” stocks like GameStop and AMC. Analysts say the price of bitcoin is now most strongly correlated to these types of high-risk, high-reward stocks. GameStop shares hit a high of $325 in January 2021 and fell about 70% to $98 at the close of trading on Friday. AMC, meanwhile, fell about 80% from $59 in June 2021 to $11 on Friday.

“It’s the same traders – the same investors,” said Don Kaufman, co-founder of TheoTrade trading education platform and trading professional. “It’s bitcoin, NASDAQ, meme stocks.”

Pedestrians walk past an advertisement displaying a Bitcoin cryptocurrency token in Hong Kong on Feb. 15, 2022. (Photo by Anthony Kwan/Getty Images)File Anthony Kwan/Getty Images

Caution Warnings

For many investors, Bitcoin’s astonishing rise 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 had only purchased bitcoin in the past 12 months. The investigation 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 pension managers the option to invest workers’ retirement savings in bitcoin.

The announcement came despite guidelines issued in March by the US Department of Labor warning pension plan managers to “exercise extreme caution before considering adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.”

In an interview with NBC News, Ali Khawar, assistant secretary of the US Department of Labor, said caution was always in order.

“We’ve seen a lot of people say, ‘It’s the next sure thing’ – with an element of ‘Go downstairs or you’ll regret it,'” Khawar said. “What you don’t often hear is the other side of the equation: that it’s a relatively young asset class, with a lot of tough questions unanswered, like how evaluated or how it is stored.”

Future prospects

But while bitcoin isn’t a sure thing when it comes to immediate investment returns, many investors still believe it’s the next big thing for the tech, said principal analyst Ed Moya. of the market within the exchange group OANDA. He compared the recent cryptocurrency selloff to the bursting of the dotcom bubble. Although 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, this also represents 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 exactly when bets on this ecosystem will pay off is now an open question. Meanwhile, bitcoin holders — especially those newer to the market — are suffering heavy losses. According to data reported by Bloombergshort-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 risky asset correlated with some of the most advanced names in tech was picked up this week by Coinbase, one of the biggest cryptocurrency brokers. Coinbase saw its shares drop almost 80%, from a high of $323 in November 2021 to around $68, including a decline of around 20% on Wednesday.

“We are seeing a bear market for growth tech stocks and risk assets,” Coinbase CEO Brian Armstrong said during the company’s latest earnings call. “And of course, Coinbase and crypto are no exception to that.”

And like these more volatile tech stocks, bitcoin is proving very interest rate sensitive. When money is more expensive to borrow, investors are less likely to invest in riskier bets on the future like bitcoin. So, as 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 reduce returns for traditional assets, we will see extremely low returns for speculative assets.”

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