Cold air has been hitting America’s eastern seaboard for weeks, sending temperatures to their lowest point in decades. But it has nothing to do with deep stagnation as investors move away from crypto assets. The price of a bitcoin fell from $124,000 in early October to around $70,000 today, and the market value of all cryptocurrencies fell by more than $2trn. While the asset class has dipped before, its boosters now seem more depressed than ever.
The price of a bitcoin has fallen from $124,000 in early October to around $70,000 today (Bloomberg).In some ways, the extent of their plight is staggering. Bitcoin’s 45% plunge is by no means the deepest on record: its price is down 77% from its peak in late 2021. It took almost three years for the market value of the crypto industry to reach new highs. Today’s bear market is only four months old.
But look at how well other asset classes are doing. Crypto investors in 2022 can take solace from the fact that plenty of others are covering their own losses. From peak to trough, the tech-heavy NASDAQ 100 index fell by more than a third that year. Now it’s not even 4% off the record high it made a few weeks ago (although some software companies have suffered). Crypto fans are sad because they are lonely.
The forces driving such a volatile and speculative market are always somewhat mysterious. It is clear that leverage and liquidation are playing an important role. At the end of September, just before the plunge began, measurable debt against crypto assets was about $74bn—and more than doubled over the past 12 months, surpassing its level at the end of 2021.
Then, starting on October 10, around $19bn-worth of leveraged bets on the crypto were quickly liquidated after falling deep into the red. Small positions have been unwound from a steady succession. Concerns have intensified about Strategy Inc., a firm that borrows and issues shares to buy bitcoins. Its share price has fallen nearly 70% since July.
Some relatively new crypto products could deepen the downturn. The advent of crypto exchange-traded funds (ETFs) in 2024 was expected to support prices by expanding the pool of potential buyers. It worked for a while. The iShares Bitcoin Trust ETF (IBIT) became the fastest-growing ETF in history with nearly $100bn in assets by October. Now, though, ETFs are driving down prices. Over the past 80 trading days IBIT has seen $3.5 billion worth of outflows – its first incremental sell-off. Much of the capital invested in the fund has now suffered losses.
The final factor weighing in on crypto is the hardest to measure: the vibe off. For a speculative asset class with no fundamental value or income-generating potential, intangibles are everything. And the glow of excitement that once surrounded digital assets seems to have faded.
This is partly because they have lost their rebellious streak. How counter-cultural can it be if America’s president and his family are knee-deep in a wealth class? Charles Hoskinson, co-founder of the blockchain platform, Ethereum, summed it up well last month. “We’re all basically part of the system, and you know what the system does when you’re part of it? They don’t make it cool.”
For some firms, crypto’s newly minted reputation has had an uptick. Institutionalization has helped providers of stablecoins, which facilitate digital payments. Assets like Bitcoin, however, have lost their cool appeal while gaining little in return; They may appear to be part of the “system”, but they are not actually accepted by it. Professional, straight-laced investors still avoid crypto. A Bank of America survey in September suggested that most fund managers have no allocation to crypto. Digital assets accounted for only 0.4% of respondents’ total portfolio value.
Central banks, meanwhile, are buying gold to hedge against inflation, geopolitical threats and sanctions. Digital assets that once promised an alternative to “fiat” money have been left out in the cold. The Czech central bank became the first to advertise buying crypto last year, collecting an experimental (and piddling) $1m-worth of bitcoin. It has not announced any plans to buy more.
Digital assets have proven more difficult than many financial columnists—once in doubt—are always eager to write obituaries for them. Despite bear market after bear market, they have always defied forecasts of wholesale declines. But this crypto winter feels unusually bitter for good reason. If the vibes don’t improve, don’t expect the throat.
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