Bitcoin’s been on a roller coaster this week, bouncing above and below $20,000, a price that is a line in the sand for the first and biggest cryptocurrency.
It’s a psychological barrier rather than one that has intrinsic importance; $ 20,000 was the line bitcoin fell just short of during its first real bull market in 2017, putting it in the mainstream public’s eye.
Having dipped below that about a half-dozen times — beginning on June 18, when it went as low as $17,700 — there’s a real question as to whether bitcoin has found a bottom and if not, where that bottom is.
This week was an important fork in the road, and bitcoin has a habit of moving dramatically over the weekend. If that happens again, that bottom could be further down than bitcoin believers hope.
The crypto markets have been spooked a lot lately — the $48 billion failure of stablecoin terraUSD and its LUNA partner coin was followed by the insolvency of hedge fund Three Arrows Capital, which in turn led crypto lending firm Celsius into possible insolvency and a couple of its other big lenders to the edge. Then there’s the whole Federal Reserve gearing up for a major recession with aggressive rate rises spooking all markets.
There’s a real possibility that one good push could send bitcoin tumbling, especially if the equities markets go south. If Monday’s price comes in stable, that’s a good sign. If it’s below $20,000, that could be a sign of big trouble to come.
In part, that’s because barriers like that are important with speculative assets, particularly ones like bitcoin without any intrinsic value. It’s arguably too slow to be an alternative payments currency. It can’t run the self-executing smart contracts that are the building blocks of everything from DeFi to supply chain management. The narrative that it’s a store of value that acts as a gold-like hedge against inflation crashed and burned in the last six months as bitcoin followed the equities markets down.
See also: Following Crypto Crash, Search for the Bottom Begins in Earnest
On June 21, Bloomberg Intelligence analyst Eric Balchunas told Decrypt that a bitcoin bull market wouldn’t happen again anytime soon.
“In every past selloff there was this thought behind it that the Fed would step in if the market really needed it, and this time they’re not going to do that,” he said, adding that without the Fed to drop interest rates as the markets tumble, crypto investors “are going to have to learn to live without the Fed, and that’s going to be painful. It’s like coming off heroin — the first year is going to be rough.”
Spooked by that sub-$20,000 dip, analysts predicted bottoms ranging from $16,000 to $11,000. But that was short term and there’s every sign that the current recession has a long way to go. After the 2018 crash, it dipped to $3,000.
But it also had a much smaller buyer pool. A recent PYMNTS report found that 23% of U.S. consumers have or had held crypto in the 12 months ending in April. That’s close to 60 million people and the majority — probably the vast majority — have only tried bitcoin or tried it first.
That’s a big, comfortable bumper of support.
What Use Is It?
Bitcoin was hugely popular, even with wealthy investors, in a high-risk, high-reward friendly market. But a recession has dramatically dampened the institutional appetite for bitcoin.
And while there are credible efforts to build a payments rail on top of bitcoin — more on that later — there’s an equally credible argument that the only killer app for bitcoin is that it came first, has name recognition, and acts as a barometer for the speculative cryptocurrency market. And that it is useful for criminal enterprises like ransomware — a return to the pre-2017 (and really, pre-2019) belief that it did nothing but provide an alternative currency for darknet markets like Silk Road.
A fair number of financial experts have changed their tune on that — notably Treasury Secretary Janet Yellen, who said basically that in her initial Senate confirmation hearing (before backtracking the next day). But plenty of others haven’t. Warren Buffet continues to scorn it, saying at Berkshire Hathaway’s annual shareholder meeting on April 30 that he wouldn’t buy all of bitcoin for $25.
Read more: Downward Spiral Points to Bigger Problem for Cryptos
However, if there isn’t a realistic use case for bitcoin — and there are plenty for many cryptocurrencies that operate as utility tokens for transactions on smart contract platforms, most notably the No. 2 by market capitalization Ethereum — you’ve got to ask if $20,000 is just a ledge to cling to on the way to the bottom of the canyon.
What Lies Beneath
The big arguments against bitcoin as a payments token are that its price is too volatile and its transaction time and finality time of 10 minutes and an hour, respectively, are too slow.
See more: Bitcoin’s 10-Minute Block Time Batches and Fluctuating Transaction Fees Give RTP a Leg Up
Former Fed Chairman Ben Bernanke said in May, “nobody buys groceries with bitcoin because it’s too expensive and too inconvenient to do that… the price of celery varies radically day-to-day in terms of bitcoin,” MarketWatch said.
It has plenty of high-powered believers, such as Elon Musk, who announced Teslas could be purchased with BTC last year, only to pull back quickly after criticism of its high environmental cost. While the same applies to Ethereum, it is working on changing that with a new, pollution-free Ethereum 2.0 in the works.
Read also: Bitcoin’s New Headwind: ESG Investors Double Down on Its ‘Staggering’ Pollution
Others, like Cash App developer Block CEO Jack Dorsey — who’s been using it for years — and Strike CEO Jack Mallers, believe bitcoin’s speed and scalability problems are solvable. More accurately, they believe those have been solved with Lightning, the largest and most promising of the Layer 2 blockchains that take most of the work of transactions off of Bitcoin’s blockchain. The transaction is made on Lightning’s far faster and cleaner blockchain, which bundle finalized transaction results and sent those back down to be written onto Bitcoin’s immutable blockchain.
Read more: Bringing Bitcoin Firmly into Payments, Strike Partners with NCR, Shopify, Blackhawk
Unveiling Strike’s use of Lightning, Mallers pointed to the low transaction costs, calling it “a new, innovative, superior payments rail that is finally embedded and distributed into our lives,” he said. “And so, I used it for the first time.”
He showed a video of himself buying a Coke and peanuts at a Chicago grocery store for $1.46. The transaction fee charged, he said, came to a tiny fraction of a penny.
“To the grocery store, it’s no different than using an Apple card or cash card, or a credit card issued by a bank.,” Mallers said. “They’re just getting dollars; they don’t care.”
But Bernanke would point not to the size of the transaction fee or the speed with which it was finalized but to how much that Coke cost on that day. And what it would be the next.
If he’s right, with no smart-contract-based uses, the bottom could be when bitcoin goes “splat” on that canyon floor.
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