Bitcoin brought investors on a roller-coaster trip, and while its value has risen significantly since its inception more than a decade ago, it’s had a lot of major downdrafts along the way. Amid the global COVID-19 pandemic, however, the current fall in bitcoin comes at a moment when many might have assumed the crypto-currency will most likely soar
Bitcoin experienced its biggest one-day drop in years on Thursday, going down from $7,600 to $5,300. The famous cryptocurrency’s price approached $4,000 Thursday night at moments. Shares in the Blockchain-tracking Blockchain Confidence Grayscale (OTC: GBTC) followed suit. Despite the price of bitcoin has been above $10,000 as recently as mid-February, the problem many crypto investors have is why the token’s price struggled to deliver on its pledge as a safe-haven asset in times of volatility in the conventional financial system.
How the coronavirus infected bitcoin’s investment thesis
Cryptocurrency proponents have long argued that tokens are perfect safe havens from wider financial markets uncertainties. With a set supply and strict guidelines for the market release of new tokens, Bitcoin will not be subject to the same coercion that central banks and government agencies may do for their fiat currencies. Bitcoin and other cryptocurrencies have generally seen their prices increase in past events which have created pressure on the financial markets. Movements like the infusion of liquidity by the Federal Reserve into the credit markets on Thursday seemed to be the kind of thing that would normally motivate bitcoin investors to get more bullish.
In that light, the fall in bitcoin prices that have been caused by coronavirus seems anomalous. Yet the knee-jerk reason for bitcoin’s plunge from many financial analysts was that cryptocurrencies had effectively lost their haven status and were again viewed as a risky asset. That’s incompatible with the basic investment argument many cryptocurrency investors have in defending their Bitcoin holdings, and if it is valid, it would potentially be a major blow to the notion that Bitcoin provides a stable alternative to fiat currencies and assets linked to those currencies.
Is there another explanation?
While the drop in bitcoin Thursday was most noticeable, earlier this week the fall in the price of the crypto token began to accelerate. That happened to coincide with the drastic collapse in oil prices resulting from reports that Russia and Saudi Arabia had failed to reach an agreement to restrict the production of crude oil. With bitcoin and other cryptocurrencies playing a key role in certain parts of the world, there was some sense in linking this hit to the energy markets.
Many who are more familiar with cryptocurrency markets did point to another potential source, however. In recent years, a Ponzi scheme run by an organization called PlusToken has taken advantage of crypto-currency investors in China and Korea, fraudulently taking over $2 billion in bitcoin and other tokens from victims of the scam. A cryptocurrency executive said Bitcoin selling by PlusToken may have been a contributing factor in beginning the avalanche of downward price action, with Ponzi scheme con artists allegedly shifting their crypto assets in ways that would make monitoring transactions more difficult.
What’s ahead for bitcoin?
The problem facing Bitcoin and other cryptocurrencies is that there is no clear explanation of why the investors want to own them. Some see Bitcoin as a viable alternative to fiat currencies, while others merely hope that they will buy Bitcoin low and sell it big, with the primary goal of increasing the valuation of their investments centered on dollars. As long as risk-sensitive speculators are actively active in the Bitcoin market, investors in cryptocurrencies may expect to continue to see violent price swings — even for reasons that do not seem to make sense. It will take a more concerted effort to unify users of bitcoin with a shared goal to smooth out the price action of the cryptocurrency going forward.