Crypto Is a Victim of Its Own Success

The past few months have been disastrous for cryptocurrencies. Even after bouncing back a bit on Friday, bitcoin is now down almost 50 percent from its all-time high in October, and other cryptocurrencies—including well-established ones such as ethereum and solana—have fallen far further. Crypto winters are nothing new: The biggest drop in bitcoin’s history, in 2011, knocked 99 percent off its value. But this one feels especially painful, because it came at a moment when crypto enthusiasts thought they had finally made it.

Donald Trump’s election finally gave the industry a president who was avowedly crypto-friendly. Trump appointed regulators who, unlike those under Joe Biden, showed no interest in limiting crypto’s spread or cracking down on crypto exchanges. In October, he pardoned the founder of the biggest crypto exchange, Binance, who had been convicted of violating U.S. law by failing to adequately prevent money laundering on the site. Trump even put out a crypto coin of his own days before his inauguration—the value of which, like most meme coins, skyrocketed before collapsing.

Crypto seemed well served by the fact that it had become more enmeshed than ever into the global financial system, and more mainstream in terms of public awareness and interest. The assumption was that this would make bitcoin, and crypto generally, more stable and reliable, and protect it from the vicious sell-offs of the past. But in fact, its integration into the financial system, which helped boost bitcoin last year, has helped accelerate its fall.

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It wasn’t supposed to be this way. The growth of crypto exchanges such as Binance had made trading bitcoin and other currencies much easier for retail investors, as did a boom in crypto exchange-traded funds (ETFs), which let investors not only buy and sell crypto but leverage their bets.

Institutional investors were also more open to treating crypto as a legitimate asset class, and adding bitcoin to their portfolios. And there was a boom in what are known as digital-asset-treasury companies: publicly traded companies whose main business was raising capital to buy crypto, and who presented their strategy as a kind of perpetual money-making machine. Buying crypto drove up the stocks of these companies, allowing them to then sell stock to raise more money to buy crypto, which drove their stock up.

These were all things that seemed bullish for crypto—until the market turned. Take those leveraged ETFs. They’re designed to give investors, say, double bitcoin’s returns when it rises. But that means investors suffer double bitcoin’s losses when it falls, which amplifies sell-offs as people bail out. Institutional investors, meanwhile, are less likely to be true believers, and therefore more likely to sell when prices start to tumble. As for those digital-asset-treasury companies, their stocks have been demolished along with crypto, which makes raising capital to buy bitcoin much trickier, if not impossible. Those companies had been a steady source of demand for bitcoin. That demand has now dried up.

More generally, the institutionalization of crypto has left the currencies without a clear hook to bring new buyers in. The psychological fervor that pushed up crypto prices has always depended on the currencies’ reputation for being radical and disruptive. As crypto has become more established, investors looking for excitement have moved on to alternatives such as prediction markets, which are both more novel and more comprehensible than crypto.

That’s why analysts and investors now say things like “The narrative has stalled” and lament the lack of a “new story” to help explain why crypto is stuck. There’s nothing to galvanize people into buying crypto now, no obvious catalyst that would make people think, I better enter that market. It hardly helps that other investments have offered higher returns with less risk: Bitcoin has actually underperformed the S&P 500 over the past five years, despite being far more volatile. So the mainstreaming of crypto has, ironically, made it harder, not easier, for it to rebound quickly, the way it has so often before.

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This decline in sentiment and interest is especially important because crypto’s value depends not on any meaningful economic fundamentals, the way the value of a stock does, but rather on how people feel about it. The traditional “fundamental” case for bitcoin has been that because its supply is permanently capped at 21 million coins, it can serve as a hedge against inflation in traditional currencies such as the dollar. But the geopolitical turmoil, economic uncertainty, and drop in the value of the dollar relative to other major currencies in recent months have undermined this case. If bitcoin truly served as a hedge, then its value should have risen sharply. Instead, its value plummeted. That’s because bitcoin is not a hedge: It’s a speculative asset, which is valuable solely because people think it is valuable.  

To be sure, plenty of people still think bitcoin is valuable: A currency that was trading at barely more than $0 in 2010 is now valued at nearly $69,000 a coin. And it has always bounced back after steep sell-offs before. But this is a new world for crypto, one in which digital currencies feel less like rebel upstarts and more like an eccentric uncle. Everyone expects crypto to either keep tumbling or rebound sharply. But predicting what comes next is impossible because its fundamental worth relies too heavily on storytelling, and its advocates haven’t found a new story to sell.