Bitcoin is a volatile cryptocurrency with a track record of “boom and bust” cycles.
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The digital currency has been on some ride over the course of 2021, hitting an all time high in April before plummeting back down.
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In this article we explain:
- What is happening to the value of bitcoin and why?
- Has bitcoin’s bubble burst?
- Will bitcoin recover?
- Will bitcoin go up if the stock market crashes?
Find out: Should you invest in bitcoin?
What is happening to bitcoin?
Bitcoin, and those invested in it, has been on a rollercoaster ride of late, rising and falling sharply on the back of a number of news stories.
To summarise, these dramatic ups and downs over the past few months:
- 16 December 2020: Price hits $20,000 per coin for the first time
- 13 April 2021: Value hits a record high of $63,375
- 22 June 2021: Falls to under $30,000 for the first time in 5 months
- 2 August 2021: Bitcoin rallies to it’s highest level since May at $40,000
- 23 August 2021: Price returns to above the $50,000 mark
So what is happening? Well, lots.
A number of negative stories and threats of further regulation have pushed the price of bitcoin down:
- In May, Elon Musk said that Tesla would no longer be accepting cryptocurrency payments over concerns about the environment
- Sanctions from the Chinese government in June 2021 on trading and mining bitcoin
- UK banks block payments to crypto exchanges
- Donald Trumpdescribed bitcoin as a scam competing against the dollar to be “the currency of the world” in June
- FBI agents seized millions of dollars in bitcoin from criminals
- UK’s financial watchdog blacklists Binance, one of the largest crypto exchanges. Big banks such as HSBC and Santander follow suit
- IMF warnings – in August on countries using cryptocurrencies as legal tender, saying it’s widespread use would threaten “macroeconomic stability” and could harm financial integrity
- Crypto heist – Cryto hackers, Poly Network, steal $600 million in August only to return more than a third of it 4 days later saying they did it “for fun” and to “expose the vulnerability” in the system before others did
But there have been more positive stories which have pushed the price upwards in 2021:
- Electric-car maker Tesla bought $1.5bn of bitcoin in February
- Morgan Stanley became the first big US bank to offer wealthier clients access to bitcoin funds – albeit restricted to no more than 2.5% of an investor’s total net worth in March
- In June, Elon Musk says Tesla will likely accept bitcoin payments again when more than 50% of its energy usage comes from renewable sources
- Amazon posts a job ad for a “Digital Currency and Blockchain Product Lead” prompting speculation it will soon accept bitcoin as payment
- El Salvador is making bitcoin legal tender from September 7
Find out more: Should you invest in bitcoin?
Has bitcoin’s bubble burst?
When assets rise very quickly in price, typically this makes a crash much more likely. Or at the very least a correction, when the price falls back down to a more “normal” level.
That is the situation bitcoin is in right now. Although no one can really say what is a “normal” level for bitcoin.
It took the cryptocurrency 11 years from launch to get to $20,000 per coin, but only three weeks for bitcoin’s price to double from there.
A decisive year for currency was in 2013. The Bitcoin price 8 years ago went from $13.40 at the start of the year to it’s height in December of $1,156.10, before falling to around $760 three days later.
Fast forward to 2020/21 and the price had soared by more than 700% in 12 months. A single bitcoin had been priced at an all time high of $63,000 in April 2021. It is now trading at just over $50,000.
Where it is heading next is equally unpredictable.
- Find out more: “Bitcoin’s rollercoaster ride has swept me to an £8,500 profit in less than a year”
Find out more: Is cryptocurrency a good investment?
Will bitcoin recover?
There are no guarantees when it comes to investing. As quickly as bitcoin falls, it can just as rapidly climb again.
There are a number of concerns about cryptocurrencies:
- Crackdowns in countries like China
- Calls for greater regulation across the globe
- Environmental concerns
- It’s price is based solely on speculation
Further regulation is seen as a threat to the decentralisation of crypto, which is impacting on price.
Bitcoin’s fans point to its positive qualities:
- Transformative technology which could revolutionise industries
- Simpler and cheaper transactions by cutting out the “middle man”
- Easier global trade
- Transactions are more confidential
- A safe store of value because it can’t be printed or seized
- Bitcoin has been touted as an alternative to gold, meaning it could prove itself as a hedge against inflation
Given its volatile nature, it is possible that bitcoin will gather momentum again at some point in the future (perhaps weeks, months or even years down the line).
But no one has a crystal ball so it’s impossible to say for sure.
Find out more: Cryptocurrency tips (and mistakes to avoid)
Will bitcoin go up if the stock market crashes?
Not necessarily. Supporters of bitcoin see it as a diversifier in balanced portfolios, but it did no better than stocks at the start of the coronavirus pandemic. This is because investors panic-sold everything.
In the first two weeks of March 2020, bitcoin went down over 40%.
“That was when we saw all equity markets take an aggressive leg down because of concerns about Covid-19,” notes Rosie Bullard, partner and portfolio manager at James Hambro & Partners.
“So it wasn’t exactly a store of value in an equity market reversal.”
That said, how crypto assets perform during stock market falls will depend on why financial markets have collapsed.
If it were an inflationary shock, such as we saw in 1974, most bitcoin investors believe it would provide protection.
- Find out more: Bitcoin alternatives: the most important other cryptocurrencies