Bitcoin plummets below $20,000 for first time since late 2020
By Erin Griffith and David Yaffe-Bellany
The price of bitcoin fell below $20,000 for the first time since December 2020 on Saturday, amid a broader market meltdown driven by rising interest rates, inflation and economic uncertainty spurred by the war in Ukraine.
The plunge — it sank below $19,000 at one point Saturday — took place over several months for bitcoin, the most popular cryptocurrency. Its fall was accelerated in recent weeks by the collapse of two major cryptocurrency projects, Terra-Luna and Celsius, while sowing doubts about the stability of the overall cryptocurrency market. Bitcoin has erased some $900 billion of value since its peak in November.
From March 2020 to November 2021, the price of a single bitcoin rose twelvefold to $64,000. It passed its previous record of $19,738 in November 2020.
The drastic sell-offs show how intertwined and complex the crypto markets have become in recent years, said R.A. Farrokhnia, a professor at Columbia Business School who specializes in financial technology. As investors flee to less risky assets, “this creates a cascade effect on top of the contagion effect,” he said.
Investing in bitcoin and other cryptocurrencies surged in the pandemic alongside other risky bets on assets like “meme stocks,” collectibles including sneakers and trading cards, and digital art and media known as nonfungible tokens, or NFTs. The speculation was driven by free-flowing stimulus checks, low interest rates on other investments, a social media frenzy, pandemic boredom and a fear of missing out on the next big thing.
Bitcoin was designed to transform the way people do transactions. The digital currency relies on a decentralized network of computers that log each transaction on a permanent record known as a blockchain. The record cannot be changed or controlled by anyone, including governments.
The excitement — and potential profits — generated by bitcoin’s rise attracted newcomers to learn about, work on and invest in cryptocurrencies. Some investors saw bitcoin as a safe place to park cash after central banks flooded the economy with money, creating fears of inflation. Bitcoin has a built-in limit to its supply; there will only ever be 21 million of the tokens. Around 19 million have been electronically mined so far.
The run-up also pushed Wall Street and Fortune 500 companies to become more open to something they once dismissed. Goldman Sachs and Morgan Stanley announced plans to offer wealthy customers access to cryptocurrency funds. PayPal and its subsidiary, Venmo, created options for trading and shopping with cryptocurrency.
Square, another payments company, bought $50 million of bitcoin and changed its name to Block, in part to signify its work with blockchain technology. Tesla bought $1.5 billion of it. The venture capital firm Andreessen Horowitz raised $4.5 billion for a fourth cryptocurrency-focused fund, doubling its previous one.
Excitement hit a peak in April last year when Coinbase, a cryptocurrency exchange, went public at an $85 billion valuation, a coming-out party for the industry. Bitcoin topped $60,000 for the first time.
Last summer, El Salvador announced that it would become the first country to classify bitcoin as legal tender, alongside the U.S. dollar. The country’s president updated his Twitter profile picture to include laser eyes, a calling card of bitcoin believers. The value of El Salvador’s $105 million investment in bitcoin has been slashed in half as the price has fallen.
Senators and mayors around the U.S. began touting cryptocurrency, as the industry spent heavily on lobbying. Mayor Eric Adams of New York, who was elected in November, said he would take his first three paychecks in bitcoin. Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., proposed legislation that would create a regulatory framework for the industry, giving more authority to the Commodity Futures Trading Commission, an agency that crypto companies have openly courted.
Through the frenzy, celebrities fueled the fear of missing out, flogging their NFTs on talk shows and talking up blockchain projects on social media. This year, the Super Bowl featured four ads for crypto companies, including Matt Damon warning viewers that “fortune favors the brave.”
That swaggering optimism faltered this spring as the stock market plummeted, inflation soared and layoffs hit the tech sector. Investors began losing confidence in their crypto investments, moving money to less risky assets. Several high-profile projects crashed amid withdrawals. TerraForm Labs, which created TerraUSD, a so-called stablecoin, and Celsius, an experimental crypto bank, both collapsed, wiping out billions in value and sending the broader market into a tailspin.
“The circular flow of funds brings questions about whether this entire ecosystem always needs outsiders to come in and sustain it,” Farrokhnia said.
Even as investing in cryptocurrencies became more mainstream, bitcoin did not find much success as a means of everyday transaction. Its price swings are volatile, and its upward trajectory has made it more valuable to hold long term. Companies created elaborate ways to make loans or let people use their bitcoin as collateral in a sector that is known as decentralized finance, or DeFi.
At just more than $20,000, around half of all bitcoin wallets were still sitting on profits, according to an analysis by the Columbia Business School. Farrokhnia said 61% of the addresses had not sold in the past 12 months, showing that many people bought into it to hold it.
Regulators have said cryptocurrencies enable tax evasion, risky behavior and fraud. Last year, China cracked down on cryptocurrency mining and trading, and regulators in Hong Kong, Canada and the U.S. have warned of regulatory actions. Britain has also banned Binance, the world’s largest cryptocurrency exchange.
Bitcoin’s widespread use by criminals, including the hackers who attacked the Colonial Pipeline last year, has generated further scrutiny. But bitcoin’s transparency — the ledger is public for anyone to see — has also helped prosecutors track down some criminals and even recover ransom payments.
The recent sell-off has led to cutbacks at companies that were in hyper-growth just a few months ago. Coinbase laid off 18% of its employees in June after posting shrinking revenue and losing active users. Other crypto companies, including Gemini, BlockFi and Crypto.com, have also cut jobs.
In past downturns, known in the industry as “crypto winters,” supporters encouraged their peers to invest more while prices were low, or “buy the dip.” But this time, analysts said, the message is not landing.
“You have so much pessimism in the space,” said Ed Moya, a crypto analyst at OANDA. “There’s no confidence right now to buy the dip.”