Cryptocurrencies including Bitcoin and Ethereum have racked up huge losses this week, yet some crypto experts say such volatility is normal and to be expected from such a speculative asset class that has already enjoyed immense price appreciation in such a short time.
From its all-time peak of $64,829.14 in mid-April, Bitcoin has plunged more than 40% in value, while Ethereum has dropped by a similar amount from its all-time high of $4,382.73 set earlier this month.
Shares of Coinbase Global, the U.S. crypto exchange, have dropped 31% since its ballyhooed initial public offering in mid-April.
But Meltem Demirors, chief strategy officer at CoinShares, a London-based company that offers digital asset investment strategies, told CNBC on Wednesday that the current correction in crypto is “healthy” and “normal” and that she remains a long-term crypto bull.
Luke Lloyd, investment strategist at Strategic Wealth Partners, a self-described crypto bull, told Forbes that corrections like this play a large part in crypto markets because they are speculative assets based solely on supply and demand.
He added that once there are large gains on the table for a certain crypto, people “tend to take profits and cash out to go somewhere else — that’s what we are seeing with many cryptocurrencies right now that have had huge gains.”
Brett Sifling, an investment advisor representative at Gerber Kawasaki Wealth Management in Santa Monica, Calif., told Forbes that the current pullback in crypto performance pales in comparison to the nearly 80% plunge the asset class suffered in 2017, adding that increased institutional adoption may lower the volatility in the future.
The recent declines in Bitcoin and other digital currencies worsened after the Chinese government’s recent decision to prohibit financial institutions from carrying out business using cryptocurrencies, and Tesla chief Elon Musk’s announcement last week that his company would no longer accept payments in Bitcoin due to climate impact concerns related to their mining. Moreover, analysts at JP Morgan said in a report on Tuesday that, based on futures contracts, large institutional investors are most likely unloading Bitcoin in favor of safe-haven asset gold.
Despite the recent drops, year-to-date, the value of Bitcoin has jumped 21% and has more than quadrupled in value since hovering around $10,000 last September, buoyed banks (Goldman Sachs, National Bank of Canada), hedge funds and other companies (PayPal, Xbox) adopting cryptocurrencies.
“Elon Musk… is the best salesman in the world with a cult-like following. Whatever Musk says is like divine words for a lot of people. But it’s not just about Musk. It’s what is perceived will happen when people like Musk get involved and either take a bullish or bearish stance towards crypto. Once Musk added Bitcoin to the balance sheet of Tesla, many investors thought many other companies would follow. It was that perception–[instead of] Musk buying Bitcoin–that drove Bitcoin higher,” Lloyd told Forbes.
Crypto is also coming under regulatory pressures. While China has banned financial and payment institutions from providing services related to crypto transactions, Gary Gensler, chairman of the Securities and Exchange Commission recently said the U.S. lacks a “regulatory framework” for “crypto exchanges” which also lack “protection against fraud or manipulation.” On Wednesday, Senate Banking Chair Sherrod Brown (D-Ohio) urged the Biden administration to crack down on cryptocurrency companies, characterizing digital assets as “risky and unproven.” On Tuesday, Bernstein analyst Harshita Rawat said in a note that government crackdown on cryptocurrencies could potentially “trigger another ‘crypto winter’ and reduce trading activity.”
What To Watch For
Lloyd thinks government regulations may hurt smaller cryptos that “no one ever heard of,” but he points out that major digital assets like Bitcoin or Ethereum will not be “greatly impacted” in the long-term from regulation because Bitcoin can’t really be regulated “unless the online exchanges are completely banned and made illegal to transact.” In addition, ironically, a little bit of regulation and government oversight may actually be bullish for Bitcoin because it bestows legitimacy upon it.