Gold stands tall amid Bitcoin’s goofiness
Posted on May 22, 2021 at 12:00 am
Bitcoin, the world’s most popular cryptocurrency started trading for less than a penny in 2010. When Bitcoin was first introduced in 2009, it was worth $0. A year later, when early adopters began trading in the digital currency, it was valued at the fraction of a cent. In 2011, the cryptocurrency hit the level of $1 for the first time. Bitcoin crossed the $1,000 mark in November 2013 as it started catching attention across the world. In the second major price surge in its history, Bitcoin went within touching distance of the $20,000 mark in 2017 but crashed to $3,300 in the next 12 months. In December 2020, Bitcoin crossed the $20K mark and then leapfrogged to an all-time record high of $64,895 hit on April 14.
Bitcoin and other cryptocurrencies saw extreme volatility this week on Wednesday 19 May. Bitcoin, for instance, started trading at $42,945. It reached a high of $43,546 during the day, dropped to a low of $30,681, and finally closed the day at $37,002. A 31% plunge in the morning and a 33% surge in the afternoon. On 14 April, bitcoin touched an all-time high of $64,895. From that high, it fell by 52% to the recent low of $30,681. A 50% fall wipes out a 100% gain. Hence, investors, and there must have been many who bought bitcoin at all-time high levels, need to wait for the cryptocurrency to rally by 100% or more to recoup their losses.
In February of this year, Tesla announced that it had purchased $1.5 billion worth of bitcoin while also suggesting that it intended to accept Bitcoins as a mode of payment from people looking to buy its vehicles. This was a show of confidence by all accounts. And the value of the cryptocurrency soared.
Reasons of Bitcoin Crash
- In second week of May, Elon Musk broke his promise. After selling about 10% of the company’s bitcoin holding he announced that Tesla had suspended purchases using bitcoin amid concerns surrounding the use of fossil fuels in mining. The price of bitcoin crashed and investors were up in arms
- The initial crash on Wednesday was prompted by an announcement from regulators
in China that cryptocurrency payments would be banned, though individuals in the country will still be permitted to own cryptocurrencies - Leveraged investors and the spike in volatility may have also played their parts in the tumult. Many traders in crypto use borrowed money to boost their returns, which leaves them vulnerable to having their positions automatically sold if prices drop. In the past 24 hours, more than 700,000 traders have had their account liquidated, equal to $8.1 billion worth of crypto
Gold vs Bitcoin
Bitcoin was sometimes compared with gold as a store of value or safe-haven asset. (Gold vs Bitcoin) But this week’s volatility and goofiness in bitcoin put this statement question mark. Safe-haven assets do not fall 30% in the morning and rise 30% in the afternoon again. This isn’t the type of price action that inspires confidence in an alternative currency as a stable store of value. But from the very beginning, cryptocurrencies have served mainly as vehicles for speculators. And their volatile nature has manifested mostly on the upside – at least up to now.
No one knows whether higher highs lie ahead or whether the goofiness surrounding Dogecoin and Elon Musk’s antics signals a major top for the asset class. What does seem certain is that crypto markets will remain both volatile and speculative. That means they may never offer the long-term stability and reliability characteristics of gold.
There’s new data showing that institutional holders have been reducing their holding of Bitcoin futures and funds in the past few weeks, and potentially reallocating that money to gold. Or they perhaps view the current Bitcoin price as too high relative to gold and thus do the opposite of what they did in the previous two quarters, i.e. they sell Bitcoin and buy Gold.
