SAN FRANCISCO – Bitcoin was conceived more than a decade ago as “digital gold”, a long-term means of storing value that will withstand broader economic trends and hedge against inflation.
But the falling price of bitcoin in the last month shows that the vision is far from reality. Instead, traders are increasingly treating cryptocurrency as another speculative technology investment.
Since the beginning of this year, the movement of bitcoin prices closely reflects that of Nasdaq, a benchmark that is heavily weighed against technology stocks, according to an analysis by data firm Arcane Research. This means that as the price of bitcoin has fallen by more than 25 percent in the last month, to below $ 30,000 on Wednesday – less than half of its peak in November – the decline came to an almost final step with a wider collapse in technology shares, as investors struggled with higher interest rates and the war in Ukraine.
The growing correlation helps explain why those who bought the cryptocurrency last year, hoping to become more valuable, saw their investment crater. And while bitcoin has always been volatile, its growing resemblance to risky technology stocks clearly shows that its promise as a transformative asset remains unfulfilled.
“This delegitimizes the argument that bitcoin is like gold,” said Vetle Lunde, an Arcane analyst. “Evidence suggests that bitcoin is simply a risky asset.”
Arcane Research assigned a numerical score between 1 and -1 to capture the price correlation between Bitcoin and Nasdaq. A score of 1 shows an exact correlation, which means that prices move in tandem, and a score of -1 represents an exact divergence.
As of January 1, the 30-day average Bitcoin-Nasdaq score has approached 1, reaching 0.82 this week, the closest to an accurate one-to-one correlation. At the same time, the movement of bitcoin prices has deviated from fluctuations in the price of gold, the asset with which it is most often compared.
Convergence with the Nasdaq grew during the coronavirus pandemic, driven in part by institutional investors such as hedge funds, donations and family offices that pour money into the cryptocurrency market.
Unlike the idealists who sparked initial enthusiasm for bitcoin in 2010, these professional traders treat cryptocurrency as part of a larger portfolio of high-risk investments in high-profit technologies. Some are under pressure to provide short-term customer returns and are less ideologically committed to the long-term potential of bitcoin. And when they lose faith in the technology industry as a whole, it affects their bitcoin transactions.
Updated
May 11, 2022, 4:49 p.m. ET
“Five years ago, the people involved in crypto were crypto people,” said Mike Burroughs, founder of the Fortis Digital blockchain investment fund. “Now you have guys who are in the whole range of risky assets. So when they get hit there, it affects their psychology. “
Stock market concerns – plagued by challenging economic trends, including Russia’s invasion of Ukraine and historic inflation levels – have been particularly pronounced in declining technology stocks this year. Meta, the company formerly known as Facebook, has shrunk by more than 40 percent this year. Netflix lost 70 percent of its value.
Shares of Coinbase, the cryptocurrency exchange, fell 26 percent on Wednesday after declining revenue and a loss of $ 430 million in the first quarter. Shares of the company have fallen more than 75 percent overall this year.
The Nasdaq is already in the bear market after finishing down 29 percent on Wednesday from mid-November. November was also when the price of bitcoin peaked at nearly $ 70,000. The crash was a reality test for bitcoin evangelicals.
“There was this undeniable retail belief that bitcoin was a hedge of inflation at the end of last year – it was a safe haven, it would replace the dollar,” said Ed Moya, a cryptocurrency analyst at OANDA. “And what happened was that inflation started to get very ugly and bitcoin lost half its value.
The prices of other cryptocurrencies have also plummeted. The price of ether, the second most valuable cryptocurrency, has fallen by about 25 percent since early April to below $ 2,300. Others, such as Solana and Cardano, have also experienced sharp declines this year.
The war between Russia and Ukraine: Key developments
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On the ground. The Ukrainian counter-offensive near Kharkiv appears to have contributed to a sharp reduction in Russian shelling in the eastern city. But Moscow’s forces are advancing on other parts of the front line.
American aid. The House of Representatives voted 368 to 57 in favor of a $ 39.8 billion aid package for Ukraine, which will lead to a total US financial commitment of approximately $ 53 billion over two months. The Senate has yet to vote on the proposal.
The Russian oil embargo. European Union ambassadors again failed to reach an agreement to ban Russian oil because Hungary opposed the embargo. The country is preventing the bloc from presenting a united front against Moscow.
Bitcoin has recovered from big losses before and its long-term growth remains impressive. Before the pandemic boom in cryptocurrency prices, its value was well below $ 10,000. True believers, who call themselves bitcoin maximalists, remain adamant that the cryptocurrency will eventually break away from its correlation with risky assets.
Michael Sailor, CEO of business intelligence firm MicroStrategy, has spent billions of his company’s money on bitcoin, building up a stockpile of more than 125,000 coins. As the price of bitcoin fell, the company’s shares fell about 75 percent since November.
In an email, Mr Sailor blamed the collapse on “traders and technocrats” who do not appreciate Bitcoin’s long-term potential to transform the global financial system.
“In the short term, the market will be dominated by those who value the merits of bitcoin less,” he said. “In the long run, maximalists will be right, because billions of people need this solution, and awareness is spreading to millions more every month.”
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