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This month’s trillion dollar cryptocurrency plunge now has a name: the Great Unwind. This is how Mark Cuban labeled the slide that saw the value of bitcoin drop over 50% in a matter of weeks.
The billionaire entrepreneur largely attributes the rout to investors who borrow heavily – a way to increase returns by using “leverage” – to buy Ethereum and other digital currencies. Now, the fall in prices has forced traders to “unwind” their positions to repay the borrowed money.
“The minute Eth drops to her tragic number, they had to relax,” Cuban tweeted, referring to Ethereum, which fell to $ 2,500, from $ 4,300, in less than two weeks. “Release, withdraw liquidity, repay. “
All that lending to traders to buy cryptocurrency didn’t seem like a problem just a few weeks ago, when companies on Wall Street and other big financial players were screaming out loud to jump into the market in full swing. boom.
Goldman Sachs reverted to cryptocurrency earlier this year, when it relaunched its bitcoin trading desk after a short hiatus. Earlier this month, the Bank of Wall Street began offering an investment service that allows its high net worth clients to profit from rising bitcoin prices without having to own the digital currency.
“Now is a great time to be in space,” John Chow, an executive at cryptocurrency trading firm Cumberland DRW, who is working with Goldman on his new bitcoin investment effort, told Bloomberg.
New trends
Goldman is hardly alone. Fidelity recently filed for regulatory approval to launch a bitcoin fund that the mutual fund and the 401 (k) giant say is aimed at wealthier individual and institutional clients.
Regulating the Cryptocurrency Industry 7:52 AM Crypto for the People
Other major financial players who cater to less wealthy clients also jumped on the bandwagon as cryptocurrency prices skyrocketed. A recent PayPal promotion offered $ 25 to the first 48,000 customers who purchased at least $ 25 worth of bitcoin using the payment company’s app. And last month, PayPal-owned Venmo began allowing users to buy and sell bitcoin and other cryptocurrencies in increments as low as $ 1.
Robinhood, the popular trading app for young investors, said its digital currency offering had 9.5 million users in the first quarter of 2021, up from 1.5 million at the end of last year. As with stocks, Robinhood allows users to buy bitcoin and other cryptocurrencies without commission, including dogecoin, the digital currency originally launched as a joke, which is among the riskiest digital currencies. . Robinhood’s website says, “Crypto trading involves significant risk.”
The timing couldn’t have been worse. Over the past month, bitcoin and other cryptocurrencies have plunged. Over the weekend, concerns over tighter government regulations spiked the price of bitcoin again. Price nearly matched its previous low of $ 30,000 before rebounding to just over $ 38,000 on Monday. Yet bitcoin’s value remains more than a third below its all-time high of $ 63,000 in April.
The downdraft reduced the total value of bitcoin by around $ 450 billion, according to Coinmarketcap.com, while ethereum and other cryptocurrencies also collapsed. The sudden drop jeopardizes the case of bitcoin bulls, which is why even average investors should try their luck on cryptocurrencies.
Crypto does not replace the dollar
One of the main arguments put forward by bitcoin proponents is that digital currencies are a cheaper and more efficient way to do business. The problem: Only a very small number of people use bitcoin to buy goods and services.
In 2016, the average number of purchases made with bitcoin reached 200,000 per day for the first time. Five years later, that figure is only slightly higher. According to Blockchain.com, there has been an average of 270,000 bitcoin transactions per day over the past month, and that likely includes many transactions in which one bitcoin investor exchanges bitcoin with another.
It’s hard to say how this compares to the number of daily transactions made in dollars. However, there are nearly 110 million credit card transactions in the United States per day. This suggests that the number of bitcoin transactions represents a tiny fraction of overall consumer spending.
At first, bitcoin supporters used to say that transactions would increase as more companies began to accept cryptocurrencies for payment. And today, a growing number of retailers are accepting bitcoin: Square, Venmo, and Paypal all support bitcoin as a payment method, while Mastercard has announced that it will allow crypto payments soon.
So far, however, that hasn’t moved the needle much.
“I don’t see a wide adoption of bitcoin as a currency,” Dan Dolev, who covers the fintech and cryptocurrency industry for Mizuho Securities, told CBS MoneyWatch. “I think it will be an uphill battle to make it something that people use to buy things.”
Crypto is not a good store of value or a hedge against inflation
Another reason why some boosters predicted that bitcoin’s popularity, and therefore its price, would take off, is because it was supposed to be a safe place to put your money. The logic was that the total number of bitcoin available, which is finite and capped at 21 million, is much less than the dollar supply. This, according to many crypto proponents, would cause the price of bitcoin to steadily rise over time.
But bitcoin has been anything but stable, with its price subject to both rises and falls. Although the value of bitcoin and other cryptos has risen, the huge price swings – which rise and fall by thousands of dollars a day – highlight their risks as an investment.
Other people have said that bitcoin, like gold, is a good hedge against inflation. But in recent weeks, as inflation fears have increased, the price of bitcoin has plummeted.
“I am neither a believer nor a disbeliever,” Dolev said. “Today a lot of people have bought cryptos at a higher price and are underwater. The question is, are they willing to wait or will they cut their losses?”
Crypto is not really global
Another common refrain of Bitcoin bulls: cryptocurrencies are a global financial asset. This, in theory, should make it easier and cheaper to do business with anyone in the world.
In reality, the cryptocurrency market has encountered the same issues as other currencies, namely that different countries have different rules governing permitted transactions. This week, China banned domestic banks and other financial institutions from supporting bitcoin. This means that they are not allowed to process payments made in cryptocurrency or allow customers of banks to hold bitcoins in their accounts. Chinese banks are also prohibited from converting bitcoin into yuan or any other currency.
Elsewhere, banks are also prohibited from trading bitcoin in much of the Middle East. In the United States, regulators appear to be leaning towards more active surveillance of cryptocurrencies. On Thursday, the Treasury Department said it would require companies to report any bitcoin payments over $ 10,000, citing an effort to fight tax evasion.
Gary Gensler, the new chairman of the Securities and Exchange Commission, recently told CNBC that if he understands why people want to invest in bitcoin, the cryptocurrency market needs to be better regulated before that can happen. wider. “I think we need more investor protection there,” he said.
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