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The first rule of thumb for writing about bitcoin is: don't write about bitcoin.
The story of the world's most famous cryptocurrency is moving incredibly fast, and its fans will soon be lining up to tell you that you got it all wrong.
But we have to write about it, because the past 24 hours have been disastrous for the crypto master - even by Bitcoin standards.
I'm going to focus on Bitcoin here - but if you've been following cryptocurrencies, you'll know that the entire market is in turmoil - to put it mildly.
What is happening?
At the time of writing, Bitcoin was trading at $21,974 (£18,000). Its value has fallen by 25 percent in the past five days alone, to its lowest value in 18 months. It peaked at about $70,000 in November. It feels like a lifetime ago.
Why?
Experts say that this is due to the global financial situation, as it is not only in the cryptocurrency world that it looks turbulent.
Recession looms, inflation is rising, interest rates are rising, and the cost of living is exorbitant. Stock markets are also volatile, with the US Standard & Poor's 500 Index now entering a bear market (20 percent down from its recent high).
As a result, large investors are less free to use their money. And many ordinary investors - not wealthy hedge fund owners or corporations but people like you and me - have little to invest in anything, a dead end.
To many, investing in something volatile and unpredictable, such as cryptocurrency, seems like a very high risk in these times.
They are not regulated and not protected by financial authorities, so if you use your savings to invest in them and lose their value, or lose access to your crypto wallet, your money is gone.
why now?
The last month has seen the collapse of two much less important - but nonetheless important - currencies and this has shaken confidence in the market in general.
As a result, people increasingly decide to sell.
The more people sell, the lower the value of Bitcoin, because that's how it works - its value correlates with its desirability. This has an indirect effect of selling more people, because they can see the value go down...and the cycle continues.
Unlike other traditional assets, bitcoin has no intrinsic value to back it up — no brick and mortar, revenue stream or underlying business, says Katie Martin, Markets Editor at the Financial Times.
“The price is just about anything people are willing to buy from you,” she told me.
She explained that when it becomes scary for people, "there is nothing to prevent trading at $10,000 tomorrow, if enough people give up or have to sell."
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| In order to stabilize Bitcoin, people who still own it will need to hold on to it |
Why at this moment?
This is the really difficult backdrop for Bitcoin - and then, the past 24 hours have seen these developments:
- Binance, the largest global cryptocurrency trading platform, has paused all Bitcoin withdrawals for a few hours. She said this was due to a "deal on hold" - although not everyone believed her.
- Cryptocurrency lender Celsius did the same - but cited "extreme market conditions" rather than technical difficulties. Now, Coinbase has just announced that it will lay off 18 percent of its workforce, blaming it in part on what it called a "crypto winter."
- Terrified investors started selling more bitcoins.
Binance's decision, and later Celsius' decision, caused panic. Imagine that you suddenly couldn't withdraw cash from your bank, or you heard that other people couldn't. You will rush to the nearest ATM, as will others in record time, and this in itself would create more turmoil and panic.
What could turn things around?
In short - in order to achieve stability, people who still own bitcoin will need to hold onto it, and others will need to start buying it again. This has happened before.
Cryptocurrency enthusiasts will tell you that now is a good time to buy, because it's cheap - and then you have to sit back and watch as it weathers the crunch. This is how it always works.
The compelling stories of those who “get rich quick” and the assertions of prominent celebrities are attracting fresh money towards cryptocurrency.
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| Hollywood star Matt Damon made an announcement for cryptocurrency in October 2021 |
Elon Musk has tweeted profusely about his love of cryptocurrency, and his electric car company Tesla invested nearly $1.5 billion in Bitcoin last year.
But investment advisors urge extreme caution.
"Honestly, it's a place that only the brave should enter," State Street Advisors managing director Altaf Kassam told.
Speaking of bravery, Hollywood star Matt Damon made a cryptocurrency ad with the slogan “Luck for the Braves” in October 2021, and it was viewed 28 million times on Twitter and YouTube.
However, the "courageous" who bought bitcoin when the ad came out probably won't now feel like they had any "luckiness" - it was about three times what it is today.
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