Bitcoin posts steepest drop in months

• Bitcoin (BTC) price lost 12% last week
• UBS sounded a warning on major cryptocurrencies’ long-term risks
• Individual investors in the US have turned more bearish
• On the other hand, BlackRock will soon dip its toes in the Bitcoin space

Volatility with bouts of selling

Bitcoin (BTC) traded 2.2% higher at around US$32,631 at 08:45 SGT on Monday (25 January 2021). This was a recovery from just five hours ago, when it plummeted to US$31,194 at 03:29 SGT.

Last week, the price of the world’s biggest cryptocurrency sank about 12% - its sharpest slide since September 2020 - renewing concerns that the rally may not keep up its momentum for long.

On Friday (22 January), the digital asset rose to cross US$32,000 briefly, following price swings in the two days prior. Market observers warned that a sustained decline below US$30,000 could indicate further losses to come, Bloomberg reported.

Over the past week, Bitcoin hovered about 30% below its recent all-time peaks. In Asia, investors have been profit-taking ahead of the Chinese New Year holidays, according to Bloomberg.

Bitcoin also likely declined when Janet Yellen remarked that cryptocurrencies were a ‘particular concern’ for terrorist and criminal financing, said blockchain advisory firm Kenetic Capital’s Jehan Chu.

Yellen, who is expected to lead the US Treasury Department under President Joe Biden, said there was a need to ensure money laundering does not occur through those channels. But Chu said such fears were ‘unfounded’, as a ‘natural correction’ was underway, and profit-taking will not ‘reverse the unprecedented assimilation of Bitcoin into Wall Street’s DNA, leading to US$100,000 levels this year’.

Meanwhile, BlackRock last week said it would add BTC futures as an eligible investment to two of its funds.

Other investors in the market who remain bullish believe BTC’s price will soar further as more institutional investors diversify their portfolios by offloading gold holdings and accumulating Bitcoin, Bloomberg reported.

Why is bearish sentiment for BTC growing?

Sceptics include UBS, which recently cautioned its clients about a likely nosedive in values of big-name cryptocurrencies including Bitcoin, and advised investors to limit the size of their investments ‘to an amount they can afford to lose’.

While cryptocurrency prices may surge in the short run, long-term risks include competition and possible regulatory intervention, said the Swiss wealth management giant.

‘There is little, in our view, to stop a cryptocurrency’s price from going to zero when a better designed version is launched or if regulatory changes stifle sentiment,’ wrote its strategists.

Pessimism is also growing among individual investors. Only 17% of individual investors foresee BTC’s uptrend continuing, according to the latest American Association of Individual Investors (AAll) Sentiment Survey.

Some 41% of AAll members believed Bitcoin’s climb in the past six month is unsustainable and that it will ‘likely crash in the near future’.