Bitcoin (BTC +0.42%) has fallen 20% in the past month, dipping as low as $82,000 on Nov. 21. Less than two months ago, the lead crypto set a new all-time high of over $126,000. Since then, the mood has soured. Some analysts fear that Bitcoin has topped out and that it will be downhill from here.
CRYPTO: BTC
Key Data Points
However, these swings -- and the fear-laden commentary that goes with them -- are par for the course in cryptocurrency investing. A slump in prices doesn't change the bigger picture. Bitcoin remains a speculative and volatile asset, and its potential remains uncertain. Equally, it's also in a stronger position than ever -- a pro-crypto administration looks likely to provide further regulatory clarity next year, and institutional investment will strengthen it in the long term.
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Bitcoin is being Bitcoin
Past performance doesn't predict the future. But it can be a good way to keep things in perspective when prices are dropping faster than competitors in an Olympic bobsleigh race.
Almost every time Bitcoin has set a new all-time high, it has fallen dramatically a few months later. And it's always recovered and soared even higher. Per CoinGecko data:
- In April 2021, Bitcoin reached a price of over $63,500. Three months later, it had dropped over 50% to below $30,000.
- In November 2021, Bitcoin reached over $67,000. Two months later, it had fallen almost 50% to around $35,000.
- In December 2024, Bitcoin reached over $106,000. Four months later, it had fallen almost 30% to around $76,000.
There are different reasons for each slump. However, in each case, the exuberant upward momentum was unsustainable. It only took a small shift in sentiment for prices to tumble. This was amplified by the high levels of leverage in the crypto market. A crack becomes a chasm -- when crypto prices fall, they fall hard.
Bitcoin is still a relatively new asset
Long-term holders can take solace from the fact that Bitcoin has always erased its losses and gone on to set new highs. It may well do so again, particularly as institutional holdings have increased in recent years, which makes the market more robust. For all the fear-mongering online, this is not even close to the lows that followed the collapse of FTX in 2022.
Even so, Bitcoin is a risky investment that's still relatively new and unproven. There may come a day when it does not recover. It is very different from, say, an S&P 500 index fund, where investors can be relatively confident of average annual growth based on almost 100 years of price data and built-in diversification.
On the positive side, the leading cryptocurrency is maturing rapidly. Fidelity points out that its network settled over $6 trillion in on-chain transactions last year, which exceeds the GDP of many countries. In the future, it may act as a backbone to various on-chain financial services.
Price dips happen, but long-term concerns remain
In the long term, there are two things that concern me about Bitcoin. The first is that its potential as digital gold -- a hedge against inflation -- does not stand up to scrutiny. Both Bitcoin and gold are independent of central governments. Only a limited amount of either of them will ever exist.
However, for Bitcoin to act as a safe haven, it needs to hold its head while all about it are losing theirs. And it keeps failing to do this. According to Bloomberg, Bitcoin's price increasingly moves in tandem with the Nasdaq-100. Where gold prices are up over 50% year on year, Bitcoin is currently down over 6%.
The second is that the rise of stablecoins may undermine Bitcoin's potential as an emerging market currency -- another potential use case. Indeed, this has recently caused Cathie Wood's Ark Invest to trim its Bitcoin targets, although it remains bullish on the leading cryptocurrency. Stablecoins provide a fast and cost-effective means of transferring money across borders. They also combine the benefits of blockchain technology with the reputation and stability of traditional assets, such as the U.S. dollar.
Let's say you live in Argentina and inflation is at almost 200%. It's easy to understand the appeal of protecting your funds by moving them on-chain. Bitcoin is one route. Stablecoins are another. These are short-term transactions, not long-term investments. That makes a stablecoin much more viable than a volatile asset that can lose 20% of its value in a month.
Bitcoin still has potential
Two of Bitcoin's potential use cases are shaky, but its dramatic growth can't be ignored. It's gone from nothing to an asset that's owned by almost a third of American adults in less than two decades. It's part of the U.S. government's strategic reserves. As an investor, there is rarely a single, straightforward narrative. Be clear about your reasons for holding Bitcoin and ensure it only represents a small portion of your portfolio.
