Silver face because… “digital gold” bitcoin

The plunge over the past few days has seen Bitcoin shed more than 50% of its value from its all-time high in just over two months. Investors who accidentally bought bitcoin at high prices lose their sleep when they still choose to “hold the goods.” The price drop shook Bitcoin’s praise for “digital gold” thanks to its scarce supply and valuable properties.

The fall in the price of the “digital gold” Bitcoin makes many investors oversleep. Photo: Bloomberg

Break Support Level

When Bitcoin price exploded to $69,000 in early November 2021, many investors and pundits alike were eagerly predicting that the largest cryptocurrency by market cap would soon hit $100,000 by the end of the year, or, if slower, in the first quarter of the year 2022. Instead, bitcoin price began its steep decline and the early bottom-fishing class was engulfed in a subsequent stronger sell-off.

As Bitcoin falls below $45K, technical analysts see 40K-42K as strong support. If this zone breaks, expect next support at $38,000. But contrary to their forecast, Bitcoin broke through these price zones one after the other. The peak of the sell-off came on Jan. 22, when Bitcoin was pushed back to 34,000, down 14% from the previous day’s close. According to data from coinglass.com, the panic prompted investors to liquidate more than $1.1 billion worth of crypto positions within 24 hours. Bitcoin’s total capitalization has also lost $600 billion since the price peaked more than two months ago.

Now, some experts are starting to ponder a scenario where Bitcoin falls into the $30,000-$32,000 price range, possibly even as high as $20,000.

Hayden Hughes, Managing Director of Alpha Impact Company in Singapore, commented, “Liquidized margin positions add pressure as cryptocurrencies held as collateral have to be sold in order to sell collateral and pay margin loans.”

Hughes believes it will take time for the market to bottom and for investor confidence to return before a rally occurs.

There are many explanations for the Bitcoin sell-off over the past few days, but it appears that the cryptocurrency market is reacting in sync with the US stock market on concerns that the US Federal Reserve will hike interest rates more and faster than expected. to deal with inflation. Wall Street just experienced its biggest weekly loss since early 2020. That means both cryptocurrencies and stocks are viewed as risky assets that don’t have the same inflation hedges as gold, known as gold, still down 0.3% gains. compared to the beginning of the year.

Still can’t replace real gold

Bitcoin is hailed as “digital gold” because, in addition to being in short supply at just 21 million dong, it is also considered a store of value and helps prevent inflation that rivals physical gold.

Even Bitcoin proponents argue that Bitcoin has unique properties that give it an advantage over gold as a store of value.

Gold and Bitcoin are similar in terms of scarcity. The total bitcoin supply is only 21 million dong and 19 million dong has been mined. The gold reserves in the earth’s crust are also only a finite number. According to basic economic principles, if the supply of an item is fixed but demand increases, the price should increase. Therefore, it is not surprising that gold is considered a safe haven asset as its value will increase over time. Aside from being used to make jewelry due to its rarity and luster, gold also has a number of uses in electronic components.

Meanwhile, bitcoin is increasingly being used in the real world. Last September, El Salvador became the first country to treat bitcoin as legal tender, allowing people and businesses to pay and pay taxes using bitcoin. On Jan. 21, El Salvador President Nayib Bukele “bragged” on Twitter that his country had bought 410 more bitcoins for just $15 million, or $36,585 each. “Some people are selling bitcoin too cheaply,” Mr. Bukele wrote. After many ground purchases, El Salvador has accumulated at least 1,801 bitcoins but is temporarily losing more than $10 million as the price of bitcoin continues to fall.

Thanks to its fast transaction speeds and low costs, Bitcoin is also used for cross-border money transfers, as repatriation through banks often incurs high fees.

According to the US Geological Survey, about a quarter of the gold reserves in the earth’s crust have been mined and there are another 50,000 tons of gold left in the ground. However, if for some reason the price of gold rises sharply, mining companies will increase their investments to exploit gold reserves that are currently inaccessible due to high costs. This means that gold supply could still increase if market conditions are favorable. Meanwhile, the bitcoin supply is a fixed number and based on computer program code that cannot be changed.

Also, unlike gold, bitcoin is easy to store and move. It is also divisible to 8 decimal places (0.000000001) and can be used in payment transactions. On the contrary, it’s impossible to bring a gold bar into a restaurant and then cut it into small pieces to pay the bill.

Cryptocurrency professionals, including Mike Novogratz, CEO of Galaxy Investment Partners, which specializes in investing in cryptocurrencies like bitcoin and ether, previously said that bitcoin embodies the qualities of gold as a currency. Assets are not correlated to stocks. However, the 100-day correlation of price action between the Nasdaq 100 stock index and Bitcoin currently stands at 0.4, with a score of 1 representing complete congruence. Meanwhile, the correlation coefficient of price volatility between gold and bitcoin is 0.008, showing that the price movements between them are not very similar.

Gold tends to have low volatility, according to Steve Sosnick, chief strategy officer at Interactive Brokers. Meanwhile, cryptocurrencies continue to show unpredictable price movements.

Earlier this month, analysts at Goldman Sachs predicted that Bitcoin could rally to a price of $100,000 if it could capture even more of gold’s “store-of-value” market share. Instead, Bitcoin and cryptocurrencies show their volatile nature when they plunge deep into a downward spiral.

Therefore, Bitcoin cannot be substituted for the same uses as gold, says Peter Schiff, CEO of Euro Pacific Capital.

“Nobody buys gold to get rich,” he said. People buy gold to maintain their wealth. Gold represents a traditional long-term store of value and inflation hedge. Bitcoin has no such properties.”

Khan Lan

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