People will say all kinds of things about what Bitcoin is: digital gold, the successor to the dollar as a reserve currency, the future of money, whatever. However, the thing with Bitcoin is that it is volatile – and therefore risky. And right now the market is feeling risk averse. The dollar price of Bitcoin has fallen by more than a third since January 1.
There is not just one cause for such a dramatic drop, although it probably didn’t help that we abandoned the zero-rate policy (ZIRP). For a while, the US central bank had set interest rates quite close to zero to stimulate the economy. In that environment, there’s no point in keeping money in your savings account — your savings aren’t yielding enough interest to keep up with inflation. Less risky assets – bonds, treasury bills – look unattractive.
So people start doing weird stuff: SPACs, meme stocks, NFTs. Why not? There is so much money drooling around and risky assets have higher returns. Besides, some people think risk is fun! After all, that’s the whole point of the gambling industry.
But the ZIRP world came to an end. Last week, the Fed increased interest by half a percentage point, the largest since 2000, and indicated that rate hikes are not over. Other strange things have happened – the Russian invasion of Ukraine, for example – that have generally calmed the markets as well. And so, while Bitcoin should be independent of the Fed, investors generally are not. If they take less risk on their portfolio, they will sell Bitcoin.
It’s not just Bitcoin. The price of Ethereum has also fallen by a third this year. An algorithmic stablecoin called Terra, which is believed to be fixed at $1, broke its peg twice since Saturday and, at the time of writing, is trading at 93 cents† An entry-level Bored Ape Yacht Club NFT has: down 55 percent in just 10 days† decode points out. This kind of chaos is hard for private investors to ride out.
Unlike regular assets, crypto markets never close. If there’s a run on stocks, the end of a trading day or weekend could give investors plenty of breathing room to reassess their strategy rather than just panic selling. But this is cryptocurrency, where you can get stretches while you sleep. Good luck there! You need it.