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Why Is Bitcoin Down Today?

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The price of Bitcoin (BTC) has been dropping sharply, thanks to major turbulence in cryptocurrency markets.

As of writing, BTC has fallen below $23,000, down from approximately $28,000 on Sunday morning. This is a major break lower from the $28,000 to $32,000 range the benchmark crypto had been seeing since the stablecoin meltdown of early May.

The current bout of crypto volatility began with the worrying May U.S. consumer price index (CPI) report on Friday, which delivered another inflation shock to the global market.

Hotter inflation has raised expectations for the possibility of a bigger interest rate hike from the Federal Reserve, which begins a two-day policy meeting on June 14.

The elevated volatility over the weekend drove a popular crypto lending company called Celsius (CEL) to pause customer withdrawals, and that move sparked fears that contagion was ripping through markets.

Bitcoin prices are now down 50% year to date and are trading well off their all-time highs around $69,000 in November 2021.

Total cryptocurrency market capitalization fell below $1 trillion this morning for the first time since February 2021, according to data from CoinMarketCap.com.

Bank Run on Crypto Lender Celsius

Celsius, a decentralized finance (DeFi) platform and one of the largest crypto lenders, has been a big source of negative Bitcoin market sentiment.

With up to 1.7 million customers, Celsius has earned a cult following in crypto world by advertising that users can earn an annual percentage yield (APY) of up to 18% by depositing their crypto holdings on their platform.

The company takes crypto deposits and loans them out to other investors and financial institutions, in a process that’s analogous to conventional bank lending. Users earn yield from the revenue Celsius generates from crypto borrowers.

The company had $11.8 billion worth of assets under management (AUM) as of May 17, down from more than $26 billion in October last year. In June, the company stopped disclosing its total AUM on its website.

In a statement released Sunday night, the company disclosed that it was pausing crypto withdrawals.

“Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap, and transfers between accounts. We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations.”

While a user’s Celsius looks and feels a lot like a conventional bank account and even uses terms that make the account appear to work similarly to a bank account, the company is careful to disclose that it is, in fact, no such thing.

“Your Celsius account is not a bank account, deposit account, savings accounts, checking account, or any other type of asset account and should not be characterized as a banking product or service,” Celsius says in its terms of use.

Bitcoin Had a Rough Start to 2022

Bitcoin ended 2021 up nearly 70%. That’s a fantastic return for any asset class, let alone one without any tangible value or the full faith and credit of a national economy behind it.

Nevertheless, a 70% annual return represents something of a comedown for Bitcoin after gaining more than 300% in the lockdown-ravaged year of 2020.

In 2022, investors are in a risk-off mood, embracing “a general flight to safety across the board in most asset classes,” said Alex Reffett, co-founder of wealth management firm East Paces Group. “Collectively, investors have shown more interest in value-based investments and less in speculative stocks and alternative ‘store of value’ investments.”

One reason is the Federal Reserve, which has raised interest rates two times this year and is poised to raise them again this week.

The Fed is fighting a historic surge in inflation that rivals anything seen in the last four decades. Just how many hikes remain is unclear, but analysts expect the central bank to keep raising rates through the end of the year and into 2023. The fed funds rate could end the year at or above 3% by some estimates.

When the Fed raises interest rates, it lessens demands for more growth companies—like tech stocks—and speculative risk assets—like cryptocurrencies and Bitcoin.

Judging how much demand for crypto will remain with all the liquidity drying up is an open question.

“We have no historical precedent for how Bitcoin and other cryptos might act if we enter a sustained period when central banks actively drain liquidity,” said Interactive Brokers’ chief strategist Steve Sosnick. “Those tend to be difficult times for investors, and riskier assets tend to underperform safer ones.”

Bitcoin Is a Risk Asset

Risk assets are investments that experience a significant amount of volatility in the usual course of the market.

Stocks, commodities, high-yield bonds, currencies—and Bitcoin—are risk assets because you can expect their prices to move up and down frequently under almost any market conditions.

Until recently, Bitcoin was considered a store of value that was somewhat immune to fluctuations in the value of risk assets. That’s no longer the case. Today, Bitcoin and the broader crypto market are influenced by economic phenomena that move the value of risk assets—things like inflation, stock markets and Fed monetary policy.

“The reason that this particular decline is occurring this year is because market narratives have shifted from risk-on to risk-off,” said Richard Smith, author of the Risk Rituals Newsletter. “Liquidity is drying up as the Fed and other central banks start to taper excess stimulus.”

Experienced Bitcoin traders are no strangers to bear markets. The price of BTC fell more than 80% in the 2017-2018 period. But that was before major corporations, like Fidelity and PayPal, invested billions in getting into the crypto game.

Fledgling crypto owners should know how much nerve is required to stick with Bitcoin over time.

Bitcoin Is Volatile By Nature

By now, it’s become very obvious that not only is Bitcoin a risk asset, but it’s also a particularly volatile one.

“Geopolitical concerns are driving market volatility in many tradable asset classes, and Bitcoin has proven to be somewhat correlated to broad market movements and less of a direct hedge against equity markets,” said Reffett.

The trouble is that Bitcoin hasn’t proven itself to be much of a hedge against anything. After all, with inflation at four-decade highs, you’d expect a currency that purports to maintain its buying power and be independent of any central bank to gain more followers.

If this description applied to Bitcoin, wouldn’t demand be off the charts?

Instead, Bitcoin appears to find adherents when the price is rising and produces doubters when sellers dominate. Like a risk asset.

Since 2009, Bitcoin has experienced multiple 50% drops from a prior all-time high. And you don’t need to look far back in time to find the last big selloff: Bitcoin fell below $30,000 in July 2021 after China cracked down on mining digital currencies.

“Anyone that isn’t ok with a decline of at least 50% should not be in Bitcoin,” said Dr. Smith. “Falls of 50% are completely normal for Bitcoin. It’s the price of admission.”

Should You Own Bitcoin?

Buying Bitcoin used to be something reserved for tech-savvy first adopters, and a genre of journalism briefly rose into existence to explain to perplexed readers how to trade dollars for Bitcoin and then trade Bitcoin for something normal, like pizza. (In hindsight, the pizza was very expensive.)

Over the years, Bitcoin has become more mainstream and easier to buy through relatively secure exchanges like Coinbase. Today, staid, level-headed money managers like the folks at Minneapolis-based money management firm the Leuthold Group make the case that a percentage point or two of your portfolio can go to Bitcoin.

“At some point the market will figure out the value of crypto and incorporate that information into a high level of price for those assets,” wrote economist Tyler Cowen in a Bloomberg column. “From then on, expected rates of return will be—dare I say—normal.”

By investing in Bitcoin now, you’re expecting that the speculative craze hasn’t diminished and you’ll be able to once again sell it later on for much more than you paid. But recent history should be that such plans, while tantalizing, are never easy to achieve.

You never quite know when the thrill of speculatively investing will be gone.

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