Cryptocurrencies, led by Bitcoin, have been on a roller coaster ride for the past six months, and after a series of record-breaking runs, they have recently started to fall off a cliff. After hitting an all-time high of more than $64,000 in mid-April, bitcoin halved in value within a month, and the market has exploded. There is talk that the cryptocurrency market is experiencing the “tulip bubble” of financial history. What’s behind the virtual currency boom and bust? What are the future prospects?
The currency circle is jumpy
Bitcoin’s roller-coaster ride began late last year. In the middle of March 2020, the price of bitcoin was hovering around 5,500 DOLLARS. In early June, it broke 10,000 dollars again. After a slow and sharp rise, it continued to rise and broke 20,000 dollars on December 16.
In January 2021, the unit price of bitcoin exceeded 40,000 US dollars, and in mid-April stood above 64,000 US dollars, fueled by the hype of institutional investors and the enthusiasm of market chasing. Since May 13, the price of bitcoin has fallen one after another, dropping as much as $10,000 per coin in a single day. On May 19 and 23, bitcoin fell more than 12% in a single day. After hitting a high of $4,300 on May 12, ethereum, which the market had recently lauded, fell nearly 60% in just 12 days.
Over the past month, the bitcoin “champions” have led the plunge, with ethereum, Dogecoin and other previously red-hot cryptocurrencies plunging across the board. In retrospect, bitcoin is back where it was at the start of the year, but the wide swings in just a few months were scary for many investors.
According to data from BTC Home network, more than 240,000 people exploded their positions in 24 hours from May 23 to 24, and about $1.499 billion of market funds went up in flames. According to CoinMarketCap, the total market capitalization of the global cryptocurrency market has fallen to around $150 billion as of press time from its all-time high of $250 billion in mid-May.
Multiple factors boost the first and then suppression
Who’s behind the cryptocurrency boom and bust? Stage view, financial institutions into the bureau and the state tightening control policies respectively played a positive and negative role.
Since the outbreak of COVID-19, in order to deal with the impact of the epidemic on the economy, the central banks of major developed economies have adopted easy monetary policies. The decline in the purchasing power of fiat currency and inflation have increased the risk aversion in the market, and a large amount of hot money needs to find high-quality anti-inflation assets. Cryptocurrencies are considered a great asset by some traditional investors because they are easy to store, carry around and difficult to steal. Then, traditional financial institutions piled in to accelerate the market rally, with a large number of retail investors following suit.
In December, Tianqiao capital announced that it would invest $25 million to set up a dedicated bitcoin fund to participate in the market. Jpmorgan Chase, Morgan Stanley, Tudor Investments, Blackstone and other traditional financial “giants” have also entered the game. Us investment legends — billionaire and Wall Street hedge fund managers Paul Tudor Jones and Stanley Druckenmiller — have also publicly endorsed bitcoin.
According to Coinbase, the cryptocurrency exchange traded about $30 billion in the first quarter of last year, and $335 billion in the first quarter of this year.
Han Guangyu, co-founder of Qitmeer Distributed Financial Infrastructure, pointed out that the entry of traditional financial institutions and capital to give cryptocurrencies more financial, was the main driver of bitcoin’s price rise earlier this year.
As the value of cryptocurrencies has soared, their irrational nature has become increasingly apparent — with some governments taking the lead from the financial risks associated with highly leveraged holdings and the problems caused by rampant mining. On May 18, the Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China jointly issued a notice, requiring member institutions not to carry out virtual currency transactions and other related financial services. On May 21, the Financial Stability and Development Committee of The State Council further called for a “crackdown on bitcoin mining and trading” to safeguard the interests of investors and stabilize the financial market.
The US Treasury Department said in a report released on May 20 that it will take stricter measures to regulate the cryptocurrency market and related transactions to prevent illegal activities such as tax evasion. According to the Treasury’s new financial account reporting system, crypto and asset trading accounts, as well as payment services that accept cryptocurrencies, will be subject to government monitoring in the future, and crypto asset-related transactions with a market value of more than $10,000 will have to be reported to the IRS.
Gan Feng, founder of Zhizhen Capital, believes that the rapid rise of the cryptocurrency market has spawned a big bubble, and the madness caused by various virtual coins named after animals at the end of the rise has made the whole market lose its mind. When the market as a whole is at a high level, sensitivity is very high, multi – do more confidence has been insufficient, once encountered an emergency or policy adjustment, disk prices will react violently.
Luo, a veteran investor in the blockchain field, told reporters that crazy intensive mining has consumed too much social wealth and energy, and institutional speculation has turned virtual currency into so-called securities, and become a tool for various digital currency trading platforms to harvest retail investors.
The bubble burst expecting rationality
Is the cryptocurrency market another “tulip bubble”? There are no easy answers to complex questions. Industry analysts disagree.
According to Gan feng, from a global dimension, digital currencies can be seen as decentralized crypto assets. Since 2018, virtual currency and physical financial markets have shown signs of interconnectivity between two parallel worlds, and there are channels for both transactions in the international financial market. The magnitude and intensity of the fall is unprecedented, can be seen as squeezing bubbles, the market correction. Short – and medium-term investors, however, will struggle.
Luo believes that the Fundamentals of bitcoin’s continued rise will not change as a result of the Fed’s release of water, but in the long run, the “coin circle” reshuffle is inevitable. While Bitcoin is currently the king of the “coin-sphere,” he said, it ultimately remains to be seen which blockchain technology will be the first to enable large-scale payments in the Era of the Internet of Things.
In fact, some analysts have long warned that cryptocurrencies are easy targets for market speculation due to their unique properties and lack of promise of value. Eswar Prasad, a professor of trade policy at Cornell University, pointed out earlier this year that bitcoin prices are entirely dependent on investor confidence. If 10% of investors choose to sell, the price could fall to zero the next day.
Nouriel Roubini, a professor at New York University’s School of Economics and International Business, believes that bitcoin is neither a currency nor an asset, has no function as a stable store of value, and has no intrinsic value. Its price rise is entirely driven by speculation.
The Governor of the Bank of England Andrew Bailey has said that virtual assets such as Bitcoin do not perform standard payment functions and have no inherent value. He urged the British public not to invest or risk serious losses.
No matter what happens next in the market, analysts say it is safe to assume that the bubble will not burst only once. There is no good or evil in the blockchain technology that supports cryptocurrency, but there are many people who attempt to manipulate the financial market for speculation and profit. National supervision is conducive to regulating the market, and investors themselves also need to be vigilant.