Bitcoin crash: what happens next?
By Dan Atkinson
12:43, 13 March 2020
Bitcoin, the cryptocurrency that has been touted as the future of money, has been having a torrid time.
In the past month, its value has halved, with heavy losses in recent days.
Looked at one way, Bitcoin price fall is the latest victim of the coronavirus epidemic. This is ironic given that the cyber-money’s fans have proclaimed it a safe haven akin to gold, but more on that in a moment. So, what is the reason for Bitcoin price drop?
Bitcoin crash: Asian short selling
Other issues affecting Bitcoin collapse in March 2020 have been fears of a lack of liquidity. To sceptics, this will merely confirm what they have said all along – that the true value of cryptocurrency is zero and that the anonymity of Bitcoin’s backers make it a high-risk proposition.
Supporters may retort that even gold, the bedrock financial asset and a very physical entity, was also lower this morning and that Bitcoin will bounce once markets return to equilibrium.
According to the latest Bitcoin price drop news, on March 12, BTC lost about half its value, plunging from $7,600 per bitcoin to $3,868. Forbes magazine attributed the Bitcoin price collapse to short selling out of Asia – a major of Bitcoin trading – and to “widespread panic and liquidity problems”. This morning there had been some recovery, to about $5,655 per coin.
But over the longer term, Bitcoin seems to have been in headlong retreat. One month ago, on February 13, it traded at $10,236.40, and it stood at a recent peak of $12,927 in June.
Only when set against its level 12 months ago of $3,851.02 on March 13, 2019, does the current price seem attractive.
With the virus panic and plunging stock markets, albeit with some recovery this morning, this ought to have been Bitcoin’s hour. Its great selling point is that it is a store of value, beholden to no central bank or finance ministry, and that it is out of the reach of national authorities.
Because Bitcoins are created, or “mined”, using blockchain technology, they cannot be faked or inflated, as the computer ledgers on which they are recorded ensure that, once a certain limit has been reached in terms of the number in circulation, no more can come into existence.
Actions such as Wednesday’s interest-rate slash by the Bank of England, from 0.75 per cent to 0.25 per cent, in order to stabilise markets during the coronavirus crisis should have burnished Bitcoin’s appeal still further, making the cryptocurrency more attractive relative to sterling-denominated paper assets.
What is your sentiment on UK100?
Is it really a currency?
As it is, the huge sell-off in shares seems to have eased this morning, with the FTSE 100 index rising 4.31 per cent to 5,463.40.
What has gone wrong, if Bitcoin price drops?
First, Bitcoin will have taken a chunk of reputational damage from the price slide. This was supposed to have been, like gold, a safe haven in tempestuous times, but it seems that, at the first serious storm at sea, the harbour walls start falling in.
This leads to a second point, which is that Bitcoin is a store of value only when enough people believe that it is. As with all cryptocurrencies, Bitcoin’s value represents an act of faith.
This is true, to an extent, of all currencies. But each major currency is backed, in effect, by the economy of the nation (or in the case of the euro, nations) that have issued it. People wishing to do business with those economies will need to acquire those currencies in order to do so.
This is especially the case with the United States, whose vast economy and central role in the world trade and financial systems provides massive support for the dollar.
Following on from this is a third point, which is that, for traders and investors, thinking of Bitcoin as a currency may not be particularly helpful. When trading conventional currencies, market players weigh up such factors as interest rates and the balance of payments of the issuing jurisdiction.
Bitcoin pays no rate of interest and balance of payments considerations are irrelevant.
Useful diversification tool
It may be more useful to think of Bitcoin in the same way as shares in a company. They pay no interest and represent a bet on the future prospects of the issuing business.
The trouble with this analogy is that companies issuing shares do so on the back of a real-economy business, whether manufacturing, transport, hotels, or anything else. However, the business of Bitcoin is… Bitcoin, and nothing else.
Does this mean Bitcoin is a busted flush? By no means. The migration of money from cash to digital continues apace and there has to be space there for services offering not just electronic transfer of paper currencies but a currency in its own right.
Despite the Bitcoin crash of recent days, suggesting that it may be more closely correlated to other markets than may have been thought, BTC remains a useful diversification tool.
Perhaps the most hopeful sign for Bitcoin traders is that the price has, as we have seen, shown some signs of recovery. Had it continued to plunge, that would have been of much greater concern and would have suggested the cyber party was probably over.
Bitcoin, it seems, lives to fight another day.
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