Is Bitcoin losing its edge? Speed of growth slows and shiny outlook blurs Image Credit: Ador T Bustamante/Gulf News

Dubai: After unprecedented demand drove the price of Bitcoin to unattainable levels in the past year, the widely-watched digital currency has been consistently plunged over the last few months.

Bitcoin started 2020 at $7,200 (Dh26,445), but ended the year at $30,000 (Dh110,189), up 296 per cent. In comparison, key US stock benchmarks, the Nasdaq rose 43 per cent, the S&P 500 rose 16 per cent and the Dow rose 7 per cent.

The surge continued full-steam into 2021. It took Bitcoin 10 years in existence to reach $20,000 (Dh73,459) on most exchanges, on December 15. Then it took just 17 days to reach $30,000 (Dh110,189). (It took the Dow Jones almost three years to make the same move.)

Bitcoin broke through $30,000 (Dh110,189) for the first time on January 2, then climbed to $32,000 (Dh117,535) just hours later. On January 5, it broke $35,000 (Dh128,554), and on January 7, it hit $40,000 (Dh146,919).

The Bitcoin price, up almost 500 per cent since its latest bull run began in October, climbed to an all-time high of just over $60,000 (Dh220,379) per Bitcoin in April but has stopped breaking fresh ground with the regularity it did through January and early February.

Bitcoin tide lifts all other cryptos

The tide has also lifted ‘altcoins’ (alternative digital currencies to Bitcoin), bringing the overall crypto market cap above $1 trillion (Dh3.67 trillion) for the first time. The 2020 Bitcoin bonanza can be chalked up to a convergence of many positive factors, as well as a convergence of narratives.

In the past, a common criticism of Bitcoin from sceptics was that it isn’t useful as a real currency and that you can’t spend it in most places. In 2020, investors decided they don’t care about that, and don’t want to spend their Bitcoin anyway.

Institutional firms flooded in, viewing cryptocurrencies as a legitimate asset to hold in their portfolio. US firms pumped $5.75 billion (Dh21.12 billion) into digital asset funds in 2020, up 660 per cent from 2019. Grayscale Investments, the largest crypto asset fund, invested $15.3 billion (Dh56.2 billion).

At the very least, the consensus had up until a few weeks ago appeared to be that Bitcoin isn’t going away, and that it will continue to exist as it has existed for 10 years. However, now doubts over the cryptocurrency hitting $100,000 (Dh367,298) this year, have resurfaced.

Was Bitcoin on the verge of replacing gold?

Was Bitcoin on the verge of replacing gold?

Both Bitcoin and gold have seen substantial swings this year, which unfolded amid a debate about whether the cryptocurrency was drawing demand away from bullion.

The digital token soared to a record near $65,000 (Dh238,744) in April, before plunging. It was last around $33,000 (Dh121,208). Gold, meanwhile, came close to sinking into a bear market (that persistently declines) in March, but reversed course to erase year-to-date losses.

Gold and Bitcoin are generally considered inflation hedges, but finance institutions or hedge funds may now be regarding Bitcoin as a better store of value, a number of matter experts and veteran investors currently evaluate.

“In the past, market participants were reluctant to own Bitcoin over gold because few understood its asymmetric upside and its utility as a superior store of value,” said Pete Humiston, head of intelligence at US-based cryptocurrency exchange Kraken.

“While neither offer yield, Bitcoin’s total addressable market extends far beyond gold’s $11 trillion (Dh 40 trillion) market cap, giving it greater utility in today’s day and age where virtually every aspect of our lives is shifting from analogue to digital.”

Bitcoin's 2021 returns now lag mainstream assets

The returns from Bitcoin this year are sliding below traditional assets as cryptocurrencies struggle to claw back ground lost in a rout in May.

The largest token tumbled almost 6 per cent at one point in trading on Tuesday and was at a two-week low of about $33,000 (Dh121,208). Bitcoin is still up 14 per cent this year but that trails commodities as well as some European and Asian stock market gauges.

The latest drop came after Bitcoin fell more than 7 per cent on Friday, with tweets by Tesla boss Elon Musk that appeared to lament a breakup with the cryptocurrency – as is the trend, moving markets.

Elon Musk has gone from a supporter of Bitcoin to seemingly falling out of love with it in a matter of months. Musk’s electric car firm stopped accepting Bitcoin as a payment method last month due to concerns over its environmental impact, resulting in a crypto market sell-off.

Bitcoin recovery leaves investors excited, yet wary
A number of issues are weighing on cryptocurrencies, including fears of a regulatory clampdown.

Crypto crackdown

A number of issues are weighing on cryptocurrencies, including fears of a regulatory clampdown. Chinese authorities last month called for a crackdown on crypto mining and trading.

Once a major player in the market, China has since moved to stamp out speculative investment in cryptocurrencies, banning a fundraising method known as initial coin offerings and shuttering local exchanges.

Beijing has been ramping up a crackdown amid concerns about financial risks and an effort to meet its green energy goals. Chinese microblogging platform Weibo has banned several influential cryptocurrency accounts following Beijing’s pledge to ramp up a crackdown on Bitcoin trading.

US financial authorities are preparing to actively regulate the cryptocurrency market amid growing concerns of a lack of oversight, the Financial Times had reported.

Smaller rivals dropping as well

Ethereum declined 7 per cent to $2,595 (Dh9,531) on Tuesday, while Dogecoin tumbled around 10 per cent trading at $0.33 (Dh1.21). Other cryptocurrencies like XRP, Litecoin also fell more than 10 per cent in the last 24 hours.

Bitcoin outflows hit $141 million (Dh521.6 million) in the week ending June 4, representing 8.3 per cent of the net inflows seen this year.

For the year so far, Bitcoin still showed net inflows of $4.2 billion (Dh15.43 billion), according to digital currency manager CoinShares data released on Monday. Digital asset product weekly trading volume on bitcoin has fallen 62 per cent compared with last month.

The cryptocurrency sector overall suffered outflows of $94.2 million (Dh346 million) last week, the data by CoinShares showed.

Analysts are of the opinion that the virtual currency is now in a cooling off period that could last a few months longer. They add that the euphoria has worn off to some extent in the retail frenzy, as regulators have moved to temper manias.