Originally, Bitcoin was supposed to be a currency.
Then, it was supposed to be a hedge against inflation, a sort of digital gold.
But as the great crypto market crash of the last three months has begun to unfold, it’s started to look like something much more mundane: a crappy tech stock.
Digital currencies, on the whole, have been in free fall lately. Despite recovering ever-so-slightly on Monday, Bitcoin has lost about 45 percent of its value since November, while other crypto assets, such as Ether, have shed even more. During this collapse, the wider crypto market has lost more than $1.3 trillion of value—roughly the worth of all outstanding federal student debt.
This clattering, monthslong crash is a reminder of why Bitcoin has never really worked well as a regular currency despite the vast resources that have been spent trying to make it catch on. Reliable currencies tend to have relatively stable values—it’s considered a big deal if the U.S. dollar moves up or down by 10 percent. Bitcoin, in contrast, can move that much in a day, thanks to the massive amount of speculative trading around it, which makes it a poor medium of exchange or store of value. Investors take this volatility for granted now. “Long downturns like this are normal with crypto,” the CEO of a crypto tech company that works with asset managers told CNBC. “Folks should know that going in.” That might be sound advice, but it makes a mockery of the idea that crypto will ever really be capable of replacing dollars or euros.
But this crash hasn’t just undercut the case that Bitcoin might be a viable currency (which has seemed pretty unlikely for a while). It’s also shattering one of the big arguments in favor of Bitcoin and other cryptocurrencies as an investment asset class. Because the supply of Bitcoin is technically capped and there’s no central bank to print more, it has long been hyped as a safe place where investors could put their money if they were worried about inflation—a form of gold without the inconvenience and cost of storing a load of shiny metal. That’s traditionally been a big part of its appeal to hard-money libertarians who distrust the Federal Reserve.
The theory that Bitcoin would act like an inflation hedge seemed plausible for much of 2021, when consumer prices picked up and crypto values skyrocketed. But now? Not so much, since Bitcoin and its cousins are in retreat even though inflation is still very much with us. “You’d think with the inflation we’re seeing, you’d see the opposite,” Bob Fitzsimmons, the executive vice president for fixed income, commodities, and stock lending at Wedbush Securities, told the Washington Post recently. “That’s been one of the selling points for Bitcoin.” In contrast, the price of actual gold, the oldest inflation hedge of all, has stayed relatively stable in recent months, and is up a bit over the last 60 days.
Instead of a currency or an inflation hedge, Bitcoin seems to be acting like something else: a tech stock. Over time, its performance has become increasingly correlated with the Nasdaq index. (Its correlation with gold is practically nil.)
Investors, in short, have been betting on Bitcoin as a gamble on tech froth, of which there’s been a lot in recent years. But lately, traders have been dumping stocks and other risky assets in anticipation of the Federal Reserve raising interest rates soon to try and control inflation. As a result, they’re dumping crypto too. (It doesn’t help matters that Russia’s central bank has announced plans to ban crypto, much as China already has.) There’s some dramatic irony here: Again, Bitcoin’s ideological roots lay partly in the desire to create a form of private money totally free from central bank meddling. But ultimately, like every other asset, its value is swinging to Jerome Powell’s tune. You can’t ever really escape the influence of the Fed.
All of this also raises an important question about Bitcoin: What, exactly, is it supposed to be good for? Nobody really needs another way to bet on tech stocks. You can … just bet on tech stocks for that. Unlike the Ethereum network, meanwhile, Bitcoin isn’t widely thought of as a useful platform for advanced financial services. (Update, Jan. 25, 2022, at 1:37 p.m.: Some hope that a recent network upgrade designed to make executing so-called smart contracts in Bitcoin will change that, but it’s unclear how much impact the update will have.) One potential answer is crime—crypto is the preferred payment method for hackers who perpetrate ransomware attacks—but that doesn’t exactly bode well for Bitcoin’s long-term future. So if it isn’t a currency, isn’t a gold substitute, and isn’t even a very good way to diversify your portfolio, what exactly is its purpose? As far as I can tell, other than buying some drugs online, the answer is absolutely nothing.