Bitcoin is down, but don’t count it out
From being the most volatile asset in the world, the cryptocurrency Bitcoin has suddenly become the most malleable.
Over the past five months, it has confounded investors by going largely nowhere, price-wise.
The Bitcoin price has been stuck around the $20,000 mark since early June, steadfastly refusing to either crash further or stage a meaningful recovery.
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See: what is Bitcoin and how did it start?
Investors don’t expect the world’s number one cryptocurrency to flatline like this. So, is Bitcoin dead or just sleeping?
One year ago, on November 9, Bitcoin was on top of the world, trading at a record high of $66,938, having more than quadrupled in a year.
It has crashed this year along with almost everything else, as the war in Ukraine, post-coronavirus supply blockades and rampant inflation destroy investor sentiment.
Bitcoin was a baby of the easy money era, where central bankers and politicians showered markets with endless monetary and fiscal stimulus to combat the global financial crisis and then Covid-19.
That era has come to an abrupt and painful end as the Fed and others drain the market of liquidity to stoke the fires of inflation.
Cryptocurrency is far from the only asset class taking a beating. Stocks, bonds and even gold have fallen while real estate appears to be suffering.
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Listen: why you should “HODL” your cryptocurrency right now
The big surprise is that Bitcoin is uncharacteristically calm, while other asset classes are being swept up in the world’s many political and economic storms.
Trading volumes have more than halved, says Matt Weller, global head of research at Forex.com and City Index.
“The BitVol gauge of volatility for Bitcoin has fallen sharply, and at one point its 30-day realized volatility fell below the broader stock market,” says Weller.
Jeremy Batstone-Carr, European strategist at advisers Raymond James, says that at one point during the recent UK gilt crisis, Bitcoin was actually “considered less volatile than the entire UK government bond market”.
First, let’s say what this doesn’t mean. Bitcoin has not transformed into digital gold through some magical monetary alchemy.
Don’t treat it as a safe haven in tough times, says Myron Jobson, senior personal finance champion at Interactive Investor.
“That thinking was diminished by the painful start to the year, punishing anyone who saw it as a store of value,” he says.
Nevertheless, many investors may be fascinated and tempted by today’s stability. It feels like Bitcoin is taking its time and waiting for circumstances to move in its favor.
Tech stocks have sold off again after a tough earnings season, but cryptocurrencies have largely held their own, said Simon Peters, cryptocurrency market analyst at social investment network eToro.
This is strange, given that the two asset classes have been “highly correlated” so far this year.
One theory is that the cryptocurrency crash has driven out dabblers, with a record low share of wealth in coins that have moved over the past three months.
The wealth held by coins older than three months is now at a record high, says Peters, citing figures from Binance.
Long-term hold-on-for-dear-life (HODL) crypto investors have little incentive to sell at today’s lows, and are sitting tight.
“However, given stock market conditions and the negative forecasts from companies reporting earnings, there is perhaps a greater inclination to sell stocks,” he says.
Bitcoin is “stubbornly clinging” to $20,000 as volatility falls, sales slow and the price potentially “bottoms out,” says Sam Kopelman, UK country manager at global cryptocurrency exchange and wallet Luno.
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The “crypto winter” may be prolonged by global inflation, the looming recession and a lack of confidence in the stock market, but is not expected to last forever.
“History shows that crypto tends to recover from sustained declines, and investors certainly haven’t lost interest,” says Kopelman.
There are early signs that institutional investors are returning to riskier assets.
“Bitcoin is scarce and the cryptocurrency is limited to a quantity of 21 million, meaning it is somewhat protected from inflationary pressures.”
Investors may have to be patient, says Kopelman.
“Long-term fear in the market means investor momentum will take some time to recover.”
Sentiment remains the main driver of cryptocurrency movement, as we saw during this summer’s bear market rally, when investors briefly chastised themselves for the Fed to take a more dovish stance. The S&P 500 briefly sprang to life. So did Bitcoin.
Investors called it a mistake, and last week Fed Chairman Jerome Powell remained hawkish as he raised the Fed funds rate by another 0.75 percent.
History shows that crypto tends to recover from a sustained decline, and investors certainly haven’t lost interest.
Sam Kopelman, UK country manager at Luno
Still, the summer rally suggests that when interest rate hikes finally peak and sentiment turns in a more positive direction in 2023, Bitcoin could benefit.
That prospect may tempt some investors to take a position in anticipation of the next cryptocurrency summer, but market sentiment isn’t the only factor influencing performance, Kopelman says.
“Ultimately, trust and regulatory clarity are key to crypto adoption and its resurgence,” he says.
Here, Bitcoin remains a mixed bag. Credit rating agency Moody’s says that while this year’s cryptocurrency losses have been largely contained if leverage builds back up, “it could eventually confuse the banking system, even as banks continue to distance themselves from direct interaction with the crypto economy”.
So-called stablecoins still refuse to disclose their investments, despite growing regulatory pressure to do so.
“Liquidity risk management and other disclosures that have become common for funds and banks are still lacking for digital asset providers,” Moody’s says.
Still, wider acceptance is growing, says Nick Root, CEO of FinTech “toolkit” Intergiro.
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See: what is a recession?
“By 2023, we expect to see an increasing number of financial institutions accepting cryptocurrency as a form of payment,” he says.
Mr Root notes that Mastercard recently said it is keen to start introducing plans to make cryptocurrency an “everyday way to pay”, while Google has announced a partnership with Coinbase, which will allow customers to pay for some cloud services with cryptocurrency early next year .
“With big firms like Google jumping on board, in 2023, we predict more banks and financial providers will join them,” he says.
For now, investors remain in the “wait-and-see” phase, with traders saying Bitcoin is unlikely to embark on a sustained recovery until it closes above, say, $22,500.
One thing hasn’t changed. Any cryptocurrency investment remains highly speculative as the end user case remains unproven.
Speculation is out of fashion for now, as everyone runs for cover ahead of the recession.
Those who still have money to throw around may be tempted to buy Bitcoin at a time when others are scared, but as always, only invest money you can afford to lose.
Fewer of us are in that position today.
Updated: 8 November 2022, at 05.00
