After enjoying the beginning of the 2020s as a largely soaring asset – viewed as a quick ticket to riches for many traders – bitcoin’s problems, which have grown deeper with the collapse of the exchange FTX, could be about to get much worse.
The digital currency has already plunged in value by 60 per cent this year after a string of high-profile collapses of exchanges, companies and projects that have relied on it or other cryptocurrencies.
Bitcoin now sells at $16,800 (£13,800), down from a peak of $64,400 in November 2021. The overall crypto market is worth $1.63tn less than it did in December 2021.
That downturn, known in many circles as the “crypto winter“, could last for a lot longer than first expected, according to many market makers. One has described the anticipated drop in cryptocurrency prices in 2023 as the “bitcoin bloodbath”.
The collapse of the FTX exchange has had knock-on effects across the market, sending investors running for safer assets to back. Investors lost more than $10bn in the week following the firm’s bankruptcy filing as they exited their long-term positions. It was the fourth-largest weekly loss ever recorded, according to Glassnode, a blockchain data firm. Blockchain is the digital ledger that records ownership of an asset (including cryptocurrencies).
“This is not the winter season anymore, this is a bloodbath, because the FTX crisis was like a domino that toppled so many companies,” said Linda Obi, a crypto commentator in Lagos, Nigeria, who works at blockchain firm Zenith Chain.
“I do think there’s a whole lot of hype around crypto, with influencer marketing and your favourite celebrities talking about crypto,” she added.
“People don’t research, and just jump in, and that should change. We have started to have serious conversations around how we can actually sanitise and advertise the space.”
The crypto winter has left some traders counting their losses, both financial and emotional. This is particularly true for so-called “retail investors” – normal people, not trained professionals, who have speculated on cryptocurrency.
There are 2.3 million bitcoins held over different exchanges – down from an all-time high of 3.1 million in 2020, according to the exchange Bitfinex. This suggests people are opting to not hold their crypto in these exchanges. However “self-custody” wallets, which are managed by individuals, have not grown.
There are signs that a significant number of retail investors have been discouraged to the point of exiting crypto entirely,” Bitfinex analysts said. Meanwhile analysts at Standard Chartered have predicted that bitcoin will fall below $5,000 next year as one of many “market surprises” that they believe could happen. That would mean it would go down another 70 per cent from its current price of just over $1,700.
“While the bitcoin sell-off decelerates, the damage has been done,” said Eric Robertsen, global head of research at the bank.
“More and more crypto firms and exchanges could find themselves with insufficient liquidity, leading to further bankruptcies and a collapse in investor confidence in digital assets.”
His warning comes after veteran investor Mark Mobius predicted that the price of a single bitcoin would fall to $10,000 due to tighter monetary policy from the US Federal reserve.
Others, like venture capitalist Tim Draper, think that we are in a brief dip. “The dam is about to break,” he said to TV channel CNBC, predicting a $250,000 price tag by the end of 2023.
Laith Khalaf, financial; analyst at AJ Bell, agreed with Standard Chartered’s prognosis to some extent. “Bitcoin could be $6,000 or $60,000 by the end of next year and neither would surprise me,” he said. “This is a market heavily driven by sentiment with little if anything in the way of fundamentals for investors to hang their hat on.”
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That sentiment will be further harmed by the looming threat of more regulation for the space, says Myron Jobson, analyst at interactive investor, who described it as potentially “a blessing and curse” for the health of the industry.
“It could help reduce speculation which could lead to higher investor confidence in the asset,” he noted. “No one short of a functioning crystal ball can accurately predict what direction the price of bitcoin and other cryptocurrencies will follow.”
So, what should we back instead? According to Mr Robertsen, it’s gold which could re-establish itself as a safe haven in 2023.
Ultimately, crypto’s fall is an illustration of the “greater fool” theory, said Rob Burgeman, investment manager at wealth manager RBC Brewin Dolphin – whereby you rely on someone paying more than you for an asset, rather than its fundamental returns or price changing.
“Any investment that relies on this is ultimately going to leave someone worse off,” he added. “Don’t let this be you.”
