It has been a bruising couple of weeks in crypto, particularly for the sector’s flagship currency, Bitcoin (BTC). In the space of just 14 days, BTC plunged 45%, from $59,229 on May 10, to $32,458 by May 24. Within that time frame, Bitcoin witnessed some truly whiplash-inducing tumbles, at one point falling an incredible 34% ($15,500) in just 24 hours.
Bitcoin’s woes have weighed on the entire crypto market, which has fallen from a market cap of $2.5 trillion on 12 May to around $1.7 trillion by May 24. This is thanks in no small part to Bitcoin’s dominance, with the oldest cryptocurrency still accounting for more than 40% of crypto’s entire market cap (though this is notably much less than the 70% it accounted for in January).
This latest shake-out has, understandably, left investors bruised and a little nervous. While wild swings are normal and expected in crypto, this one has been one of the worst. Short-term triggers include Elon Musk, who dropped BTC from Tesla’s accepted methods of payment citing environmental concerns (how’s the space exploration going, Elon?) switching instead to Dogecoin whose developers he is reportedly privately mentoring.
While this shorter-term issue is largely welcomed by long-term investors, pressure on Bitcoin has also been compounded by China’s latest cryptocurrency crackdown. In moves a little broader than those seen in recent years, the Chinese government is also targeting Bitcoin miners — 75% of which reside in the country. This, understandably, is having a larger and likely more sustained impact on Bitcoin’s price.
Zooming out the charts
In the midst of what seems like a lot of really bad news, however, it is important to stand back, zoom out on our charts and find some perspective. While Bitcoin’s plunge has been unpleasant, the coin is still 90% up over 6 months (November 27, 2020 — May 24, 2021) and an incredible 343% on the year (May 26, 2020 — May 24, 2021) [Source: Coingecko]. Let us pause for a moment on those numbers, because they are HUGE.
In comparison, the US’s flagship S&P 500 index of the country’s biggest stocks is up a paltry 15.6% over six months and 40% over one year. Yet that isn’t paltry at all: that is the best year it has seen since the big post-financial crisis bounce-back of 2009–10. In Europe, the Euro Stoxx 50 has returned similar gains (14.9% and 35.8%, respectively) — again another killer year — while the UK’s FTSE 100 is somewhat lagging with 10.3% over six months and 16.2% over one year (which is what a mutant variant of Covid-19 and Brexit will do for you). [Source: Google Finance]
The number of new Bitcoin addresses has also soared over the past year, averaging around 14 million new wallets every month between April 2020 and April 2021 compared to around 11 million created per month over the same period in 2019/20 [Source: Glassnode].
A very good year
It is fairly clear, then, that this has been a very good year for Bitcoin. And why? Because Bitcoin is now mainstream. What was once the pet project of anarchist computer programmers is now a $700 billion asset sitting pretty in the portfolios of some of JP Morgan’s wealthiest private clients. That’s right, JP Morgan — the bank that can trace its roots back to 1871 with the CEO that in 2017 said he would fire anyone that touched Bitcoin: that one. And then there is Goldman Sachs, who just this week declared Bitcoin an asset-class unto itself.
In addition to adoption by some of the world’s biggest asset managers, banks and hedge funds, Bitcoin has also found more avenues to be used as a currency over the past 12 months. This is thanks to the increasing growth and rollout of card-based crypto services, as well as PayPal’s pledge to start allowing its users to pay the 28 million businesses it serves in the crypto they can now buy directly on its platform.
Strong, long-term fundamentals
Bitcoin now has a clear double use case: an inflation-busting, digital store of wealth, and a viable currency (especially in countries with rapidly depreciating, unstable currencies like Venezuela, where more than 20,000 retailers now accept it). This is vastly different from 2018: Bitcoin and crypto’s annus horribilis that saw BTC lose 80% of its value over 12 months.
To tackle this worst-case scenario head-on, though, if Bitcoin were to lose 80% of its value peak to trough, we would see it hit around $12,000. Now, this might seem bad right now, but it is still 35% above where we were a year ago ($8,883 on May 26, 2020). And let’s remember that 35% over a year is the best performance Europe’s stock market has smashed out for more than a decade.
As we enter what could be a sustained rocky period for Bitcoin and crypto, it is important to remember these numbers and focus on the long-term. Smart investors will take a leaf out of the books of stalwarts of the stock market like Warren Buffet, who made his billions by picking stocks he liked, investing, then heading to the golf course for a decade.
If you like Bitcoin, if you believe in it, then nothing has changed for you. The fundamentals remain the same and, as in any sell-off, those with the strongest fundamentals will survive and thrive.