Cryptocurrency is plunging again, reviving questions about its stability and usefulness beyond serving as a high-risk asset.
The digital money known as bitcoin, recently touted as a kind of digital gold that could serve as a hedge against inflation and geopolitical uncertainty, has lost nearly half its value over the past four months. The losses accelerated on Thursday, with the popular cryptocurrency losing more than 13% of its value.
The irony is that the price of traditional gold has soared more than 25% over the same period.
Why We Wrote This
Despite a president who has boosted digital money, cryptocurrency markets have been roiled in recent months by economic uncertainty and geopolitical strains. The sell-off accelerated this week. It is raising questions about theories that bitcoin can be a kind of digital gold, a haven from financial storms.
“We’ve seen this argument from the pro-crypto crowd that bitcoin is this safe haven, but it never really works out,” says Igor Pejic, a tech strategist and author of “Tech Money,” a book about the new rules of technology investing, which is due out in May. In the end, bitcoin moves with tech stocks, he adds, soaring when market sentiment on tech improves and plunging when it sours.
Market sentiment on tech stocks has soured over the past few days. Artificial intelligence company Anthropic is introducing AI technology that might replace specialty software on which companies currently rely. Those software companies potentially could face big losses in sales. The benchmark tech-heavy Nasdaq index fell 1.5% on Thursday.
Bitcoin’s fall has been far more dramatic. From a high of more than $126,000 in October, bitcoin’s price plunged below $64,000 on Thursday afternoon – a nearly 50% decline. Ethereum, the second-most popular cryptocurrency, is down by a similar amount. Many analysts say the rout may not be over.
The Trump administration’s embrace of crypto was supposed to usher in an era for it to flourish. A friendlier regulatory environment and the launch of exchange-traded funds investing in the digital currency helped push up investors’ enthusiasm. President Donald Trump last year also established a federal strategic reserve of bitcoin.
Mr. Trump and his family are also connected to World Liberty Financial, which focuses on a special kind of digital money known as stablecoins. Stablecoins aim to maintain a fixed relationship with a traditional currency, such as the dollar, so they’re not typically subject to the swings that other cryptocurrencies are.
In recent months, economic uncertainty and rising geopolitical strains have made investors jittery enough to begin selling their holdings. The selloff accelerated on Wednesday, after Treasury Secretary Scott Bessent told the House Financial Services Committee that the government had no plans or power to bail out bitcoin. The plunge has wiped out all the gains bitcoin had made since Mr. Trump came into office.
The downturn itself is nothing new. Over the past 12 years, bitcoin has seen six declines of 60% or more, says Campbell Harvey, a finance professor at Duke University.
Each time, the digital money has rebounded and reached new highs, he adds. It’s anybody’s guess whether that will happen again. There are some new wrinkles this time.
One change is that it’s easier to “short” cryptocurrency – to bet that its price will fall in the future, Professor Harvey says. This kind of sell-now-buy-later strategy can open a door to investor manipulation. It’s also easier now for investors to use an opposite strategy, borrowing to buy now with the expectation that its price will rise in the future.
If those investors are wrong and prices plunge, as they are today, they may be forced to sell to pay for the debt they’ve incurred. That heightens the selling pressure on crypto, making it even more volatile on the way down.
“We’ve seen this movie so many times,” Professor Harvey says. “It’s an extremely volatile asset.”