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Let's hope you didn't jump on the bitcoin bandwagon a year ago. If you bought $1,000 worth of bitcoin when prices peaked in November 2021, your investment would be valued at only about $250 today.
On Friday, one bitcoin cost about $16,700. The price has declined by more than 75% since it reached a record high of $68,790 on Nov. 10, 2021, according to CoinMarketCap.
Bitcoin has gone through crashes like this before. In December 2017, the crypto reached a then-record high just above $20,000, and its price skidded all the way down to $3,191 the following December, an 84% decline.
The cryptocurrency has posted two declines of more than 50% in the past three years — first when the pandemic threw the global economy into upheaval in March 2020, and then again during a downturn after bitcoin hit a then-record price above $64,000 in April 2021.
The bitcoin crash of 2022 is just the latest reminder of the risks associated with investing in cryptocurrency, given its extreme volatility.
Of course, only the unluckiest of investors who bought at the peak are actually down 75% on their investments. And pretty much no matter where you've been investing, including the S&P 500, your portfolio is probably down this year. It's also important to note that for long-term investors, these are just losses on paper. You only realize a loss when you sell.
Why is bitcoin down this year?
Crypto and stocks have often followed the same pricing trends in 2022. Both asset classes have been impacted by high inflation, which prompted higher interest rates as well as recession concerns, says Alkesh Shah, a global crypto and digital asset strategist at Bank of America.
But crypto's declines have been steeper this year than those of other investment categories that are considered risk assets, like tech stocks, which are down about 30% this year, Shah says. It's a different story, however, if you look farther back in time.
“On a two-year basis, the cryptocurrency sector is up over 300% versus say software technology stocks that are up 35% over the last two years," he says. "So it's a significantly outperforming group on a two-year basis, but it definitely corrected this year along with the other risk assets."
Bitcoin specifically is actually down about 5% over the past 24 months. But if you invested in bitcoin four years ago, you would have tripled your money.
Crypto exchange concerns — and shifts to crypto wallets
With crypto prices down more than stock prices this year — but up more than stocks over longer time frames — both crypto’s fanatics and its doubters have fodder to make their arguments.
“It depends on how you want to view it, and it seems like the situation gives everybody something to talk about, but certainly given the events that have happened with FTX’s bankruptcy, the crypto skeptics are certainly the loudest at this point,” Shah says.
Even before the recent collapse of the major crypto exchange FTX, Shah says crypto prices were impacted this year by the bankruptcy of crypto hedge fund Three Arrows (3AC) and the lending platform Voyager Digital, as well as challenges for another crypto lender, BlockFi, which is now preparing a potential bankruptcy filing, according to the Wall Street Journal.
“3AC, Voyager and BlockFi all ran into problems and then they had to unwind their positions, which then caused more pressure on bitcoin,” Shah says.
The price of bitcoin hasn’t crashed further amid the FTX fiasco, but there has been a trend of investors pulling their funds out of crypto exchanges and moving them over to crypto wallets, according to Shah. Some people are worried about having their money in exchanges, fearing that others could go under.
“Right now, the trend post-FTX is not that bitcoin is going down,” Shah says. "It's people moving bitcoin off of the exchanges and putting it into wallets."