"It took Bitcoin a mere three months to go from trendy to tacky," said economist Dr. Marion Laboure, a researcher at Deutsche BankUpscale fashion designer Karl Langerfeld once cracked, "Trendy is the last stage before tacky."
The late mogul's insight into the rag trade may also apply to Bitcoin.
"Just as a 'fashion faux pas' can happen suddenly, we just received the proof that digital currencies can also quickly become passé," Dr. Marion Laboure, an analyst at Deutsche Bank in London, said in a research report. "It took Bitcoin a mere three months to go from trendy to tacky."
Bitcoin's recent swoon sliced as much as 50% off the cryptocurrency's value from its all-time high before recovering some of the loss and raises basic questions about its emergence as an asset class and its utility in commerce.
Two events caused the drop: Elon Musk said Tesla would no longer accept Bitcoin as payment for its electric cars and the People's Bank of China restated its ban on the use of cryptos for any type of payment.
Musk, who has shown great skill in using the media to propagate his message and cast himself as an iconoclast, made a rare flub when some ambiguous tweets he put out were interpreted as indicating that Tesla had sold all or part of its stake in Bitcoin. He later said that Tesla had not sold any of its Bitcoin, which according to Reuters had an estimated value in Tuesday's trading of about $1.26 billion, a 49% drop from the $2.48 billion it held at the end of the first quarter.
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Despite the gallons of ink (or bushels of pixels) spilled on Musk's comments, the overriding issue is Bitcoin's value as an asset and utility in commerce.
"Bitcoin transactions and its tradability are still limited," Laboure said. "The real debate is whether rising valuations alone can be reason enough for Bitcoin to evolve into an asset class, or whether its illiquidity is an obstacle."
Last year 28 million Bitcoins, or 150% of the total in circulation, changed hands compared with 40 billion shares or Apple, or 270% of the outstanding shares, she said.
The number of Bitcoins worldwide is capped at 21 million and there are about 18.71 million now in circulation. Bitcoin miners expand the supply and update the blockchain by solving detailed hexadecimal puzzles.
"Due to Bitcoin's limited tradability, it is expected to remain ultra volatile," Laboure said. "A few additional large purchases or market exits could significantly impact the supply-demand equilibrium. The root causes of Bitcoin's volatility include small tactical asset allocations and the entries and exits or large asset managers."
She estimated less than 30% of Bitcoin's transactions stemmed from payments for goods and services, while 70% represented financial investment.
Most institutional investors buy-and-hold Bitcoin as a bet on future price appreciation.
"Bitcoin's value will continue to rise and fall depending on what people believe it is worth," Laboure said. "This is sometimes called the 'Tinkerbell Effect' – a recognized economic term based on Peter Pan's assertion that Tinkerbell existed simply because children believed she existed. In other words, the value of Bitcoin is entirely based on wishful thinking."
Bitcoin proponents say it makes no sense to spend an appreciating asset, Bitcoin, on depreciating items such as a car.
Proponents also note that Ethereum, second only to Bitcoin in market value, is designed for commerce and therefore better represents the future of cryptos in commerce.
China's central bank hit Bitcoin hard when it said the crypto "is not a real currency" and "should not and cannot be used as currency in the market."
But China's antipathy to cryptocurrencies isn't new and shouldn't have surprised the market. China first kept a wary eye on Bitcoin and then closed online exchanges. Last year, Beijing outlawed the issuance of private digital currencies.
The People's Bank of China is developing a digital yuan and testing it in selected cities.
"Until recently, regulators and authorities have been reluctant to move too fast into the cryptocurrency space because there has been a lot of innovation," Laboure said. "This allowed the financial sector to innovate. Competition and innovation are usually positively correlated. But governments are unlikely to relinquish their monetary monopolies. As Bitcoin or other private cryptocurrencies start to seriously compete with . . . government currencies, regulators/policymakers will crack down."
The analyst said regulations may be issued late this year or early 2022, and "could be a turning point for cryptocurrencies around the world."
The U.S. Digital Asset Framework establishes criteria a cryptocurrency must meet to be listed on an exchange. The Biden Administration is expected to issue additional regulations to clarify the law.
"In the end, regulating cryptocurrencies is not that difficult," Laboure said.
For now, Bitcoin proponents continue to push ahead.
The Block reported that institutions, most in North America, had pre-ordered about 300,000 top-of-the-line Bitcoin mining machines from China valued at an estimated total of $500,000.
Lennard Neo, head of research, Stack Funds, Singapore (Photo credit: stackfunds.com) stackfunds.comLennard Neo, a certified financial analyst and head of research at Stack Funds in Singapore, saw Bitcoin's return to its mean trading range as a positive development.
"I believe this to be a good reset for the euphoric conditions we had for the past weeks," he told Newsweek. "Markets tend to normalize towards their moving averages. This is no different for Bitcoin as it has been trading above its mid- and long-term averages for an extended period. Bitcoin price seems to have reverted to the daily 250-day moving average, and we have to wait until volatility subsides to see if this should remain a support."
In mid-day trading Thursday, Bitcoin changed hands at $39,600.73, up 6.56% in the last 24 hours and up 43.46% for the year. The intra-day high is $42,589.86 The all-time high is $64,829.14. The current market cap is $741.53 billion, CoinDesk reported.
Market Pulse
The Federal Reserve may review its policy of near-zero interest rates and hefty bond purchases as inflation rises during the economic recovery.
© Smith Collection/Gado/Getty Images Federal Reserve headquarters in Washington, D.C. Smith Collection/Gado/Getty ImagesThe nation's central bank has kept interest rates at 0-0.25% and purchased U.S. Treasury and mortgage-backed bonds valued at about $120 billion each month as part of the effort to support the economy during the COVID-19 pandemic.
The Fed has nearly doubled its pre-pandemic balance sheet to $7.9 trillion. But the economy's strong recovery and a sharp increase in inflation may require a review of current policy, notes of the Federal Open Market Committee's (FOMC) April meeting revealed.
"A number of participants suggested that if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases," the summary of the Fed's policy-making committee said.
In the past, the Fed has been adamant that it won't alter policy until its goals in employment and inflation have been reached. It expected to keep interest rates low through 2023. While the Fed's policy-making committee said that may change, it didn't establish a timetable for possible revisions.
At a press conference after last month's meeting, Chairman Jerome Powell said recovery from the coronavirus pandemic remained "uneven and far from complete." He said the economy hadn't yet shown "substantial further progress" needed before the committee will consider a change in policy.
Since the meeting, the consumer price index clocked inflation rising at 4.2% year-over-year and the economy is projected to grow about 10% in the second quarter. But job growth has lagged. Nonfarm payrolls increased 266,000 in April, far below the $1 million new hires analysts expected.
Despite the jump in prices, Fed officials expect inflation to ease later in the year. The central bankers said they will permit inflation to rise a bit above their long-stated 2% target and now consider that figure an average rather than the upper limit before raising interest rates to ease price increases.
Low rates are intended to encourage consumer spending, which represents about two-thirds of the U.S. economy, and business investment. FOMC members said rising demand as the economy restarts and tight inventory in some sectors of the economy due to kinks in the supply chain will send inflation above 2%.
"After the transitory effects of these factors fade, participants generally expect measured inflation to ease," the FOMC minutes said.
The Federal Funds Rate is the rate banks pay to borrow from each other overnight. The Fed has cut the rate by 1.5 percentage points since the COVID-19 pandemic slammed the economy in March 2020 to its current range of 0-0.25%.
The Federal Funds Rate is the guide for short-term rates, but also affects long-term rates. Slashing the rate is intended to lower the cost of mortgages, car loans and other consumer credit. But it also reduces the interest paid to small savers at commercial banks.
The Fed's current easy money policy has goosed the economy. Low interest rates have boosted real estate sales nationwide.
All regions of the country experienced double-digit year-over-year price increases: Northeast (22.1%), West (18.0%), South (15.0%) and Midwest (14.4%), National Association of Realtors, a Washington-based trade organization, reported.
On Thursday, the U.S. Labor Department said initial jobless claims last week totaled 444,000, below the Dow Jones estimate of 452,000. The total showed a decline from the previous week's 478,000 new claims for unemployment benefits and was the lowest since March 14, 2020.
However, continuing claims increased by 111,000 to 3.75 million, but the total runs a week behind the tally for initial claims.
"Economic momentum is now sufficiently robust as to be the source of reopening strains, compared to the pandemic-caused loss of activity experienced a year ago," Mark Hamrick, Senior Economic Analyst at Bankrate in New York, said in a release.
"Even so, the disappointing April payrolls picture has, at the very least, prompted a re-assessment and questioning whether matching millions of available jobs with the unemployed is more difficult than imagined."
The key question:
"As we've seen this week, investors remain on edge that the central bank might take away the punch bowl sooner rather than later, but the actual timing of that eventuality remains a huge question," Hamrick said.
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