Why has the price of bitcoin collapsed?

Bitcoin is going through one of the worst streaks in its history: from its highs last year, has lost almost 80% of its value and in the last two weeks depreciations exceed 40%. What is this collapse due to? Essentially, for three reasons.

First, the current inflationary environment has not sat well with bitcoin. Although this asset is intended to be a refuge against inflation, it is not necessarily going to be at all times and under any circumstances. In this sense, the current very high inflation has spurred a rise in interest rates by central banks that has increased the yield of bonds, and if bonds become a better refuge against inflation than they were, then part of the capital invested in bitcoins can migrate to the bond market. In other words, whoever invested in bitcoins when the German 10-year bond was at -0.5%, can stop investing in bitcoins now that he pays 1.5%. All this, by the way, was something relatively predictable that it was going to happen.

Photo: Photo: Reuters/Jose Cabezas.
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Second, during the last two months we have also witnessed the ‘bankruptcy’ and disappearance of various crypto assets, the most notorious of which was the pair terraUSD and luna (whose fiasco we already analyzed at the time). Not only that, some crypto asset trading, custody and lending exchanges (such as Celsius) have also faced corralitos that have scared off some investors. In other words, if a year ago ‘crypto’ was all the rage, now ‘crypto’ is becoming a toxic category that many want to run away from. To the extent that bitcoin is put in the same bag as other crypto assets (although there are qualitative differences between bitcoin and other crypto assets), bitcoin is also being dragged down by divestment in this heading.

And third, during the euphoria of the last few years, many investors bought crypto assets (including bitcoins) on a leveraged basis: They requested an overcollateralized loan for their investments in crypto assets and that heated the market. Now that prices are plummeting, those leveraged buyers are facing ‘margin calls’ that they are not being able (or intending) to meet by posting more collateral or paying down debt. And if the ‘margin calls’ translate into executions of the collateral of crypto assets (including bitcoin), the price drops will be even more intense, fueling new ‘margin calls’ at lower price levels.

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Let us take as an example of the latter one of the most famous investors in bitcoins: Michael Saylor. Saylor has a leveraged position of 19,000 units of bitcoin at a purchase price of $11,600 per bitcoin (about $220 million) with Silvergate Bank. If bitcoin falls below $11,600 and Saylor does not hedge his position (and may be incentivized not to), Silvergate will liquidate the 19,000 units of bitcoin and this would sink the daily price of bitcoin. The very prospect of such a scenario happening with Saylor (or other leveraged investors) is what is encouraging bearish speculators to short bitcoin and other crypto assets: they know that if they hit certain critical price levels, their ‘bets’ will become self-fulfilling prophecies and swell to make money.

These three factors are leading to the fact that for now bitcoin sales are much higher than purchases (all the supply, voluntary and forced, that floods the market is not being reabsorbed by demand) since, therefore, its price is not stabilize but keep falling. Unfortunately for the bitcoin community, it is doubtful that these three trends will be reversed in the short-medium term: The rate hikes will continue, the fiascoes in the crypto ecosystem will continue to reproduce and, therefore, the ‘margin calls’ will continue to be executed.

We are probably headed for a deep purge, both in quantity, price and variety, of the crypto world.: fewer assets, fewer intermediaries, less capital and fewer investors. A purge that few will deny that it was necessary for a long time to be able to develop on firmer ground, but that threatens to add a stigma to this category of assets (as there was with the ‘dotcom’ since 2001 or with housing since 2007) stunt their growth for quite some time. In short, after a lush summer for bitcoin, a cold winter has arrived and we will see if spring ends up returning… and what kind of spring.

Bitcoin is going through one of the worst streaks in its history: from its highs last year, has lost almost 80% of its value and in the last two weeks depreciations exceed 40%. What is this collapse due to? Essentially, for three reasons.

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