Do you still own Bitcoin or any other cryptocurrency? After rocketing in value during the Covid-19 pandemic, Bitcoin and the wider cryptocurrency market have seen their valuations decimated since late last year.
However, despite the fact the leading cryptocurrency has lost almost 70% of its value since setting a record high of over $65,000 last November, a Bitcoin is still worth almost $20,500. That’s more than at any point in its near 14 year history before December 2020. The entire cryptocurrency market is still has a market capitalisation of over $1 trillion, more than at any point prior to early 2021 despite losses of around 65% since its peak, also in November last year.
Source: CoinMarketCap.com
For context, Facebook owner Meta Platforms has suffered similar losses since last year, seeing its share price plunge from $378.69 in September to just $99.20 at the beginning of this year – a loss of around 74%. Even Alphabet, Google’s holding company, is down around 35% from last year’s highs and Amazon by around 44%.
When it comes to the future prospects of Bitcoin and cryptocurrencies more generally, there are two main schools of thought. The first is that a huge bubble has burst and while hoddlers (hold-on-for-dear-life), many of whom bought into cryptocurrencies for the first time during the pandemic, are still putting a floor under valuations by refusing to sell, the end is nigh. Sooner or later, a lack of real life use cases for Bitcoin and other cryptos will see even the most stubborn cut their losses, sending valuation down to zero, or close.
The second school of thought is that Bitcoin and other cryptocurrencies have simply been hit by the sell-off that has hit growth stocks over the same period. Markets have turned negative on riskier assets whose high valuations were founded on future performance, faith in which has been dented by soaring inflation and rising interest rates.
The second group see the fact the bottom hasn’t fallen out of the cryptocurrency market despite its heavy losses over the last year as strong evidence the nascent sector will bounce back when overall market sentiment does. Comparisons are drawn with the dotcom bubble of 2000 alongside forecasts the cryptocurrency sectors will come back from the current setback stronger.
If you are still holding cryptocurrency investments, you may well be struggling with the dilemma of what course of action to take. Lock in losses suffered over the past year but retrieve some value by selling now? Or keep on hoddling in the belief, or hope, of a market rebound several months down the line that will see part or all of those losses retrieved?
The case against staying invested in Bitcoin and cryptocurrencies
Those that expect Bitcoin’s value to drop to or close to zero in the months and years ahead can also be roughly split into two camps.
The first, like European Central Bank president Christine Lagarde, who in May said cryptocurrencies are “worth nothing”, are convinced the entire sector falls somewhere between a pyramid scheme and a classic bubble. They expect the cryptocurrencies boom to be filed alongside tulip bulbs as the latest entry into the history of financial bubbles which, in hindsight, made no sense at all.
This camp’s conclusion is decentralised, unregulated cryptocurrencies as an alternative to fiat currencies issued and managed by central banks have no future. The concept was a fad that may have lingered for longer than expected but will fade away no the Emperor’s lack of garments has been revealed.
Quoted in The Times, Steve Hanke, an economics professor at John Hopkins University, expresses the position of the other half of the camp. The half that doesn’t see a future for Bitcoin and the rest, or large majority, of the incumbent cryptocurrencies. But can see a future for the technology more generally. He said of Bitcoin:
“It’s a speculative asset, not a currency. It does not have any of the characteristics of a currency and it is very rarely used in any kind of transaction, except for illegal activities.”
“I think bitcoin’s fundamental value is probably close to zero. The only way you can take its price to the moon is if demand keeps increasing. My view is that demand will eventually evaporate. There will be superior cryptocurrency that wipes bitcoin off the map.”
Here the presumption is there is a future role for blockchain-based cryptocurrencies but not those that have formed the first wave of the nascent technology. A future cryptocurrency that does make the breakthrough into mainstream financial markets as an asset will run on far more efficient blockchain technology than Bitcoin. And it will have to submit to some form of centralised regulation to prevent it from facilitating criminal activity to gain mainstream acceptance and be transactable as an actual currency.
If these arguments prove correct, holders of Bitcoin and other cryptocurrencies to gain popularity over the past decade or so, would be best advised to sell now while they can still recover a reasonable amount of value. A Bitcoin-USD exchange rate of a little over $20,000 is as good as it’s going to get.
The case for staying invested in Bitcoin and other cryptocurrencies
There are, however, plenty of voices still convinced the valuation slide of Bitcoin and the broader crypto market over the past year has simply mirrored the sell-off of other higher risk asset classes, like growth stocks. Their presumption is the valuation of Bitcoin and other major cryptos will bounce back with more positive market sentiment. And that while there may be casualties, the sector will come out stronger, as the internet economy did in the wake of the bursting of the dotcom bubble.
The argument against selling out of Bitcoin is that the financial establishment writing it and cryptocurrencies off more generally have a clear vested interest. Deregulated currencies getting a strong foothold in financial markets will meaningfully shift the balance of power away from central banks and those who have benefitted richly from the status quo.
The argument that Bitcoin has no inherent value can be reflected back towards fiat currencies. Their value can also be argued as entirely predicated on the social contract of everyone agreeing they have value and acting as such. Fiat currencies are also mainly nothing more than lines on a computer code and the only real difference from cryptocurrencies is that they are centrally controlled.
Crypto-advocates see those pulling the strings of the current fiat currencies model as determined not to allow their hegemony and ability to manipulate financial markets to be disrupted. They argue that inflation as a result of money printing, quantitative easing to give it its technical term, benefits those at the top of the chain at the cost of those at the bottom. And that cryptocurrencies like Bitcoin, whose number is a finite 21 million, will re-democratise finance by acting as a store of value that can’t be eroded in the same way.
The pro-Bitcoin camp also point out that its price has historically moved in four year cycles and the latest drop in value is simply a continuation of that trend. Over the 18 months after Bitcoin underwent a halving event in 2016, its price jumped from $663 to $19,428. A year later it had fallen below $3,500. A similar rise and fall occurred in the months after its latest halving in May 2020 and the next bitcoin halving is expected to take place in 2024.
For those that believe Bitcoin moves in four year cycles influenced by these halving events, the current price dip is a buying opportunity ahead of the next move upwards.
Another argument in favour of not giving up on Bitcoin and cryptocurrencies just yet is that what is currently being described as a “Crypto Winter” will lead to healthy consolidation in a market that currently consists of somewhere between 13,500 and 21,500 cryptocurrencies, with Bitcoin accounting for about 40% of overall sector market capitalisation. The genuinely useless cryptocurrencies will vanish and the strongest propositions reinforce their positions.
Ben Dean of the investment firm Wisdomtree comments:
“The argument that ‘bitcoin is dead’ has been made many times before. But it is no longer possible to talk about the market as a whole just by looking at bitcoin’s price. I see very few signs that the whole ecosystem is going to disappear. It’s really a question of which spaces might thrive and why.”
If you do plan to stay invested in Bitcoin and cryptocurrencies assess your appetite and tolerance for loss
The reality is, nobody really knows if this time it genuinely is curtains for Bitcoin or if it will make another comeback to deny the naysayers. This writer’s personal opinion is the biggest problem for Bitcoin and cryptocurrencies is not the inefficiency or the early blockchain technology they are built on which can be improved and integrated over time through hard forks.
I see the real problem as the fact it is inherently extremely difficult to regulate cryptocurrencies like Bitcoin in their present format, making them an obvious facilitator of criminal activity.
