There comes a time “in the life of every cryptocurrency investor… when they watch a significant amount of their money disappear in the span of a few hours”, says Jen Wieczner in New York magazine.
Bitcoin fell by 30% last week and is down by more than 40% from its mid-April highs. The past week has seen a stomach-churning series of rallies and reverses, including a 30% fall in a single day on 19 May.
Bitcoin is a poor store of value
At the time of writing bitcoin was still well short of $40,000; it traded as low as $31,970 at the weekend. The price has been hit by news from China, where regulators last week banned banks and payment companies from accepting cryptocurrencies. Elon Musk’s Tesla also says it will no longer accept payments in bitcoin because of the environmental impact of bitcoin mining.
Even after this fall, a person who bought the cryptocurrency five years ago is still “sitting on gains of over 6,000%”, says Aaron Back in The Wall Street Journal. The “libertarian cryptoevangelists” hope digital currencies will one day replace government-issued money. But this bout of extreme volatility is a reminder that bitcoin is a lousy store of value or means of exchange.
If bitcoin isn’t a currency, then what is it? asks John Authers on Bloomberg. Perhaps the best analogy is with big tech stocks such as Facebook or Google. At a market capitalisation of more than $800bn, bitcoin is comparable in size to some of these firms. Bitcoin often mirrors their price movements too. If anything, the cryptocurrency resembles an early-stage tech company, with “promising but unproven technology that people are prepared to buy”.
The bitcoin market is refusing to mature. As Avi Salzman notes in Barron’s, the market capitalisation of bitcoin has risen almost 100 times since 2016, but it “is just as volatile as it was five years ago”. That is “almost unheard of in other markets”. Usually “an asset becomes less volatile as its value grows and its investor base widens”.
Big institutional investors had driven much of the enthusiasm about cryptocurrencies this year, but they could be getting cold feet. JPMorgan reports that “professional investors have been shifting their crypto assets to gold”, the first time that has happened for several months. Long reluctant to dive into unregulated assets, the big investment banks have been forced into the crypto market by “obsessive interest from some customers”, says The Economist. Goldman Sachs recently relaunched its crypto desk, while BNY Mellon is working on rolling out bitcoin exchange-traded funds. Wall Street’s financial “muscle” will be vital if bitcoin is to flourish, but a “prolonged rout could…scare off prospective converts and trigger a regulatory crackdown”.
Bitcoin has been declared dead after previous crashes only to “pick itself up and start again”, says Authers. It helps that it inspires “cultish devotion”, with buyers resembling “believers rather than investors… was this the top of the bubble? It might be, but it probably isn’t”.