Downward Spiral Points to Bigger Problem for Cryptos

Bitcoin Value

There’s a lot of attention being paid to bitcoin’s collapsing price today as it dipped below $31,000.

And with good reason. As recently as a week ago, bitcoin pundits were wondering if it was going to push back above $40,000. Now, they’re talking about whether it will go into the $22,000 to $24,000 range, dropping not just to half of its November all time high of more than $68,000, but to one-third.

As staggering a story as that is, it’s really a sign of a bigger story that involves cryptocurrencies in general.

Simply put, almost all of the 100 biggest cryptocurrencies are falling in sync with bitcoin, and have been for the past week. They rose in the leadup to Federal Reserve Chairman Jerome Powell’s announcement of a 0.5% interest rate hike, and then dipped afterward.

This means that not only is bitcoin is reacting like the stock market to financial news, but so is all of crypto. If you look at the top 100 cryptocurrencies’ 24-hour and seven-day price charts, they look close enough to a cut-and-past job to say that they’re in sync with bitcoin.

No New Economy

The idea that bitcoin was a hedge against inflation and would react differently than the equity markets in a downturn, pitched loud and hard in 2020 and especially 2021, was far from the strike zone.

From a market perspective, it’s clear that bitcoin is acting like an investment that people bought when it was booming in a bull market and are abandoning in an economy that looks to be heading into a recession as the Fed tries desperately to curb inflation.

The recent downturn also shows that the idea that altcoins like ether, as well as top Ethereum-killer blockchains like Solana, Cardano and others, aren’t going to behave much differently than bitcoin in a downturn — at least as far as the market is concerned.

More to the point, you see that same reaction from not just from the dozen or so altcoins that those outside the crypto world have heard of, but from virtually all of them.

And while altcoins may have much more functionality than bitcoin — powering everything from decentralized finance (DeFi) lending platforms to cutting middlemen out of transactions — they are long-term investments. That isn’t actually a problem, as that’s why they were created.

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The Value of Bitcoin

Crypto advocates argue that cryptocurrencies are not just investments but are “utility coins” that have a functional use. In theory, that gives them a value that is separate from bitcoin, which has been touted as a “store of value” investment like gold that will retain its value regardless of inflation.

As for bitcoin, its problem comes down to the reality its value based on absolutely nothing other than people thinking it’s worth something, meaning it would not be a viable store of value. As Warren Buffet said very forcefully at Berkshire Hathaway’s annual shareholder meeting on April 30, he wouldn’t buy all of bitcoin for $25.

And if bitcoin’s store of value continues falling, a lot of the gloss of bitcoin as an investment rubs off.