A dramatic sell-off in bitcoin and other cryptocurrencies has outpaced a marked retreat in the U.S. stock market, as the Federal Reserve’s pivot from emergency support spooks investors who piled into highflying but risky assets during the pandemic.
The sell-off accelerated a two-month slide in the global cryptocurrency market that has vaporized $1.4 trillion in value: After reaching a high of roughly $3 trillion in early November, the total value of digital assets sat just above $1.6 trillion early Saturday afternoon, according to CoinMarketCap.
Vocal supporters of bitcoin and other cryptocurrencies suggest they have the potential to transform finance and are pushing for crypto to edge further into mainstream use as a store of value or a payment alternative. But many people are buying — and, increasingly selling — crypto as a speculative bet in hopes of turning a quick profit.
The latest crash is demonstrating the perils of the approach, just as millions of Americans have joined the digital gold rush in recent months.
Backers of bitcoin in particular argue its value lies in its limited supply — the network behind it will only mint 21 million of the tokens — suggesting it should serve as a safe place to park money during times of high inflation. But prices are rising across the economy at their fastest clip in 40 years, putting the thesis under strain. To combat this, the Fed is preparing to raise interest rates, leading many investors to pull back.
The stock market sell-off has been pronounced and attracted the most attention in recent days. The Dow Jones industrial average fell 3.9 percent for the week, while the broad-based S&P 500 shed 5.1 percent since Tuesday. The tech-heavy Nasdaq composite index fell 6.2 percent this week. But instead of investors pulling money out of the stock market and piling it into bitcoin, the pullback from crypto has been even faster.
“You’d think with the inflation we’re seeing, you’d see the opposite,” said Bob Fitzsimmons, the executive vice president for fixed income, commodities and stock lending at Wedbush Securities. “That’s been one of the selling points for bitcoin, so its correlation to stock prices has surprised me.”
Matt Maley, chief market strategist for Miller Tabak + Co., said bitcoin and other cryptocurrencies got swept up in a frenzy of investor optimism as the Fed deployed its vast emergency intervention to prop up a pandemic-ravaged economy in 2020.
“It’s human nature to think, ‘I’m making money, therefore I’m really smart and this thing will keep going up,’ ” he said. “They were right, but not as right as they thought they were.”
He said he still believes bitcoin will prove itself as a sort of next-generation gold, but it will take time for investors to gain confidence in its safety.
The wild, at times precipitous, swings in the assets’ values have increasingly caught Washington’s attention, intensifying questions over how the emerging technology should be regulated. The attention from regulators and lawmakers has spurred the industry to assemble an army of lobbyists to fend off tougher scrutiny, even as it’s unclear what regulation would even begin to look like.
The most recent price plunge comes as the Federal Reserve is taking its own steps, weighing whether to launch a U.S. digital currency, akin to electronic cash that would be backed by the central bank. On Thursday, the Fed released a long-awaited report exploring its options. For months, crypto experts, economists and lawmakers alike have been eager for any insight into the Fed’s closely held thinking.
The report reached no conclusive answers, instead wading into the pros and cons of any decision. That’s in keeping with the Fed’s slow movement on issues around digital currencies, even as other central banks experiment with their own versions. The Fed has made clear that, rather than race to beat its competitors, it will be patient and deliberate, and Fed officials routinely caution that any action would ultimately depend on approval from lawmakers in Congress.
The crypto crash came as the stock market saw its worst week since the start of the coronavirus pandemic. Just about every sector of the stock market sold off, with technology companies like Apple and Netflix taking massive blows. The drop offered a sobering reckoning for investors after the markets closed out 2021 in joyful fashion, despite the fact that so many other parts of the economy remain compromised by the ongoing pandemic, soaring inflation and instability in the job market.
Even so, popular interest in cryptocurrency has exploded in recent years. Nearly 30,000 bitcoin ATMs have popped up nationally in the last few years, and even major sports stadiums are now being renamed for cryptocurrency exchanges. Just this week, New York City’s new mayor, Eric Adams, announced that he would convert his first paycheck into two cryptocurrencies. Adams’s office said the paycheck will be deposited with Coinbase, an online platform used for buying cryptocurrency, and then converted into Ethereum and bitcoin.
But even crypto’s most enthusiastic supporters are up against the day-to-day reality that the digital systems only go so far. Users would be hard-pressed to rely on bitcoin to pay for a meal at a restaurant, a movie ticket or a quick run to the convenience store.