Omicron variant takes a bite out of bitcoin

Far from being a modern safe haven against market crashes, bitcoin fell by more than 20% this week as the Omicron variant ran rampant.

Even bitcoin can’t escape Omicron. The digital currency plunged over the weekend, tumbling by more than a fifth to hit $41,967. Bitcoin reached an all-time high of $68,521 last month but has since lost momentum. Despite the latest pullback the digital currency is still up 75% since the start of the year. 

The “gut-wrenching fall” will have left “even some veteran crypto bulls feeling a touch queasy”, says Mark DeCambre on MarketWatch. Crypto’s fans argue that digital assets aren’t correlated with the prices of other assets such as stocks and bonds, providing invaluable portfolio diversification. The trouble is that “crypto has been trading more in step” with equity and bond markets recently, with the weekend plunge following a sell-off on the S&P 500.  

The past couple of weeks have shown that bitcoin is not a safe-haven when equity markets plunge, says Ipek Ozkardeskaya of Swissquote, an investment platform. “Bitcoin is a very high-risk asset, and it is not a proven hedge against inflation.” The case for crypto being an inflation hedge looks “flimsy” given the asset’s “huge volatility”, say Simon Duke and Ben Martin in The Times. Cryptocurrencies cannot be “stable stores of value when they have become a magnet for financial speculators.” The latest sell-off was compounded by leverage: some traders speculate on cryptocurrency with “as little as 5% of the size of their investment upfront”. Falls in bitcoin can then force exchanges to sell clients’ positions, fuelling price falls. 

Bitcoin’s growing popularity with Wall Street is part of the problem: the stockmarket’s recent falls may have forced hedge funds to sell their bitcoin holdings to raise cash. As a “growing army of institutional investors” move into crypto, bitcoin’s correlation with stocks will only increase.  

Recommended

Cryptocurrency roundup: Putin backs crypto-mining, and spoof McDonald’s coin takes off
Bitcoin & crypto

Cryptocurrency roundup: Putin backs crypto-mining, and spoof McDonald’s coin takes off

Saloni Sardana looks at the cryptocurrency stories that caught our eye this week.
28 Jan 2022
Are recession fears justified? Maybe it’s time to look on the bright side
Economy

Are recession fears justified? Maybe it’s time to look on the bright side

There's a lot to feel nervous about right now, and many people are worrying about an impending recession. But it's by no means certain, says John Step…
28 Jan 2022
Making money is about to get much harder
Investment strategy

Making money is about to get much harder

Soaring inflation, geopolitical risk, bubbly stockmarkets - getting a return on your investment is going to get much more difficult – but not impossib…
28 Jan 2022
How to invest in the chipmakers fixing the semiconductor shortage
Share tips

How to invest in the chipmakers fixing the semiconductor shortage

Last year’s chip crunch brought home how dependent the world is on these tiny pieces of silicon. Chipmakers are rushing to build new factories. Will t…
28 Jan 2022

Most Popular

Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022