SAN FRANCISCO — The price of Bitcoin fell below $20,000 for the first time since late 2020 on Saturday, amid a broader market meltdown driven by rising interest rates, inflation and the economic uncertainty stimulated by the war in Ukraine.
The dip – it dropped below $19,000 at one point on Saturday – took place over several months for Bitcoin, the most popular cryptocurrency. Its downfall has been accelerated in recent weeks by the collapse of two major cryptocurrency projects, Terra-Luna and Celsius, while casting doubt on the stability of the overall cryptocurrency market. Bitcoin has erased some $900 billion in value since peaking in November.
From March 2020 to November 2021, the price of a single Bitcoin increased twelvefold to $64,000. It surpassed $20,000 in November 2020, which was a record high.
The drastic selloffs show how intertwined and complex crypto markets have become in recent years, said RA Farrokhnia, a professor at Columbia Business School who specializes in fintech. As investors flee to less risky assets, “this creates a cascading effect on top of the contagion effect,” he said.
Investments in Bitcoin and other cryptocurrencies have surged during the pandemic alongside other risky bets on assets such as “meme stocks”, collectibles including sneakers and trading cards , and art and digital media known as non-fungible tokens, or NFTs. The speculation was driven by fluid stimulus checks, low interest rates on other investments, a social media frenzy, pandemic boredom and fear of missing out on the next big thing.
Bitcoin was designed to transform the way people transact. Digital currency relies on a decentralized network of computers that record every transaction in a permanent record called a blockchain. The record cannot be modified or controlled by anyone, including governments.
The excitement – and potential profits – generated by Bitcoin’s rise to prominence has spurred newcomers to learn about, work with, and invest in cryptocurrencies. Some investors saw Bitcoin as a safe place to store money after central banks flooded the economy with cash, creating fears of inflation. Bitcoin has a limit built into its supply; there will only ever be 21 million chips. Around 19 million have been mined electronically so far.
The rise has also caused companies on Wall Street and the Fortune 500 to open up more to something they once shunned. Goldman Sachs and Morgan Stanley have announced plans to offer high net worth clients access to cryptocurrency funds. PayPal and its subsidiary, Venmo, have created options for trading and shopping with cryptocurrency.
Another payments company, Square, bought $50 million worth of Bitcoin and changed its name to Block, in part to signify its work with blockchain technology. Tesla bought $1.5 billion of it. Venture capital firm Andreessen Horowitz has raised $4.5 billion for a fourth cryptocurrency-focused fund, doubling the previous one.
The excitement peaked in April last year when Coinbase, a cryptocurrency exchange, went public at an $85 billion valuation, a release night for the industry. Bitcoin surpassed $60,000 for the first time.
Last summer, El Salvador announced that it would become the first country to classify Bitcoin as legal tender, alongside the US dollar. The country’s president has updated his Twitter profile picture to include laser eyes, a calling card of Bitcoin believers. The value of El Salvador’s $105 million investment in Bitcoin has been halved as the price has fallen.
Senators and mayors across the United States began touting the merits of cryptocurrency, as the industry spent heavily on lobbying. Mayor Eric Adams of New York, who was elected in November, said he would take his first three paychecks in Bitcoin. Senators Cynthia Lummis, Republican of Wyoming, and Kirsten Gillibrand, Democrat of New York, have proposed legislation that would create a regulatory framework for the industry, giving more authority to the Commodity Futures Trading Commission, an agency that commodity companies cryptography have openly courted.
Through the frenzy, celebrities fueled the fear of missing out, flogging their NFTs on talk shows and talking about blockchain projects on social media. This year, the Super Bowl featured four ads for crypto companies, including Matt Damon warning viewers that “fortune smiles on the brave.”
That blustering optimism waned this spring as the stock market crashed, inflation soared and layoffs hit the tech sector. Investors began to lose faith in their crypto investments, shifting money to less risky assets. Several high-profile projects have collapsed amid withdrawals. TerraForm Labs, which created TerraUSD, a so-called stablecoin, and Celsius, an experimental crypto bank, both collapsed, wiping out billions of value and sending the broader market into a tailspin.
“The circular flow of funds raises questions about whether this whole ecosystem still needs outsiders to come and support it,” Farrokhnia said.
Even though investing in cryptocurrencies has become more mainstream, Bitcoin hasn’t found much success as a daily transaction medium. Its price swings are volatile and its upward trajectory has made it more valuable to hold for the long term. Companies have created elaborate ways to provide loans or allow people to use their Bitcoin as collateral in an industry known as decentralized finance, or DeFi.
At just over $20,000, about half of all bitcoin wallets were still based on earnings, according to analysis by Columbia Business School. Mr Farrokhnia said 61% of addresses had not sold in the past 12 months, showing that many people have been buying there to hold onto it.
Regulators have said cryptocurrencies enable tax evasion, risky behavior and fraud. Last year, China cracked down on cryptocurrency mining and trading, and regulators in Hong Kong, Canada and the United States warned of regulatory action. Britain also banned Binance, the world’s largest cryptocurrency exchange.
The widespread use of Bitcoin by criminals, including the hackers who attacked the Colonial Pipeline last year, has prompted further scrutiny. But Bitcoin’s transparency — the ledger is public and accessible to anyone — has also helped prosecutors track down some criminals and even recover ransom payments.
The recent liquidation has resulted in cuts to businesses that were in hyper-growth just a few months ago. Coinbase laid off 18% of its employees in June after experiencing a drop in revenue and losing active users. Other crypto companies, including Gemini, BlockFi and Crypto.com, have also cut jobs.
In past recessions, known in the industry as “crypto winters,” proponents encouraged their peers to invest more when prices were low, or to “buy the dip.” But this time, according to analysts, the message is not getting through.
“You have so much pessimism in the space,” said Ed Moya, crypto analyst at OANDA. “There is no confidence right now to buy the dip.”
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