What happening to bitcoin: does it make sense to buy it now?

Who is to blame for the collapse of cryptocurrencies, what will happen next, and whether is it worth including bitcoin in your portfolio?

Serious knockdown that bitcoin got last week sent the rest of the cryptocurrency market into a dive. Today, it would seem that it has reached the bottom, but there are opinions that the price correction will continue. The prices and capitalisation of cryptocurrencies have collapsed by half, with the exception of some coins — for example, Cardano, which even increased. What happened to bitcoin last week and what should investors do now? We investigated it together with the economist Artur Safiulin.

Chronicle of the Bitcoin Dive

Almost most of 2020, the price of bitcoin was at the level of 10,000 dollars, sometimes falling to 5,000. The growth began in October — and in two months bitcoin grew to 20,000 dollars. By January 8, 2021, it was already worth 41,96 thousand — and became more expensive (with occasional stops) until May 11. On the eve of the first collapse, bitcoin was trading at the level of 56,700 dollars apiece. Why has the cryptocurrency become so much more expensive in the last six months? This is explained by that investors wanted to insure some part of their assets against inflation. We have already explained how the flywheel of inflation is spinning around the world in connection with anti-currency programmes to stimulate the economies of many countries and that we also expect the weakening of traditional currencies.

Then there were events that brought down the quotes of bitcoin, and then the rest of the cryptocurrency market. The lowest point of the fall was the value of May 23 — 34,700 dollars.

It all started with Elon Musk's statement on May 13 that Tesla would not accept bitcoin as a means of payment for the company's products (and this is not just electric cars). Literally, Musk said the following:

“We are concerned about rapidly increasing use of fossil fuels for bitcoin mining and transactions, which has the worst emissions of any fuel. Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.”

At the same time, it was said that the company would not sell its bitcoins (bought in March of this year for a total of $1,5 billion) and use them for operations until the production of cryptocurrency went with the help of sustainable energy sources. This statement simultaneously brought down the price of bitcoin by 10% and, in fact, gave an impetus to investors to fix their participation in this asset — a sale began, sometimes chaotic.

But the strongest blow to the quotes was inflicted by the Chinese authorities on May 18, when they announced the introduction of restrictions on trading in cryptocurrencies. Chinese financial institutions and companies were banned from providing services related to the exchange of cryptocurrencies, and investors were warned about the dangers of speculative trading. The next day, the bitcoin exchange rate fell by 30% — the biggest one-day drop since March 2020. Etherium and Dogecoin lost 25% and 29% that day.

It should be noted that in China, cryptocurrency trading has been banned since 2019, but transactions with bitcoin on the Internet forced the authorities to go even further. Initially, the Chinese authorities, banning trade, fought, according to them, against money laundering. Now they are driven by the goal of protecting the Chinese private investor from a bubble in the cryptocurrency market — “the volatility of the crypto markets threatens the security of assets and disrupts the normal economic and financial order”. The most dangerous thing about this for cryptocurrencies is that other countries may follow China's example. Moreover, national banks in many countries are already working to create their own digital currencies.

What awaits bitcoin?

In the short term, the price will recoup this drop, there is no doubt about it. Even though all the savings of 2021 were actually invalidated, this did not frighten investors — more and more people are coming to the cryptocurrency market who are afraid of missing out on “such a unique opportunity” to earn money.

According to forecasts, the number of cryptocurrency owners is going to double by the end of the year. At the same time, most new investors do not understand the risks of investing in bitcoin and other cryptocurrencies. According to a ZME Science survey, only 16,9% of those who bought a cryptocurrency fully understand its value and potential, and 33,5% do not have a clue at all. Until this very flow of investors runs out, nothing terrible will happen in the cryptocurrency market.

Not for nothing some respected economists call bitcoin a cult that is based on the blind faith of its adherents and in which the influx of new believers does not dry up. In fact, bitcoin has zero value, since it is not tied to real economy. Since 2009, it has not been found a use for it — it has not become a convenient medium of exchange, a stable means of saving, or a monetary unit of account. The value of bitcoin is in the opinion that it is a technological way to save your money in the event of the inevitable collapse of all the classic money in the world (the so-called “fiat” money), which will definitely happen.

Paul Krugman, winner of the 2008 Nobel Prize in Economics, calls this view “libertarian nonsense plus techno jargon”. You can't say it better.

In the long run, everything will depend on financial regulators and big businesses. The growth in 2020 was due to institutional investors who entered bitcoin as part of the diversification of their portfolios. Large businesses are gradually adding bitcoin to their services, although not as quickly as previously thought. The speculative component of cryptocurrencies does not allow you to easily part with it, for example, by paying for lunch at a restaurant. After all, it can grow tomorrow or the day after tomorrow and offset your lunch two or three times. Payment services — such as Pay Pal or Square — now offer the opportunity to buy cryptocurrencies in their applications. There are already quite a few examples of the penetration of cryptocurrencies into everyday life and calculations.

In the future, cryptocurrencies will be highly regulated and will not become a substitute for traditional currencies, their niche is an investment tool or a means of saving. Many analysts believe that bitcoin will compete with gold. For example, Grayscale Bitcoin Trust cryptocurrency fund from JPMorgan bank raised $3 billion — and this was just the funds from gold. I wonder how these investors are feeling now? In general, in order for the capitalisation of bitcoin to equal the value of gold in private hands (in bullion, coins and traded funds), its price must rise to 146,000 dollars.

All this can only be possible if this bubble does not burst (bitcoin is often called the “mother of all bubbles”). A 65-fold increase in the last three years is a very clear sign of a bubble.

One shouldn't completely turn away from the cryptocurrency market: small funds (which are not too valuable to lose) can and should be diversified among several coins, especially now that the market has adjusted downwards. It is necessary to monitor your investments every day, fixing the growth immediately and waiting in “fiat” money in anticipation of the next rally in another coin, since there are already more than 3,000 of them on the market.

By Artur Safiulin

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