Is 'mother of all bubbles' about to bust as Bitcoin plummets 21%?

Dubai - Bitcoin last week hit a record high above $41,000, swept up by a combination of a weaker dollar, economic optimism and a wave of bullish sentiment towards cryptocurrencies

After a persistent dizzying rally, Bitcoin plummeted as much as 21 per cent over Sunday and Monday in the biggest two-day slide since March amid widespread concern that the “the mother of all cypto bubbles” may be about to burst.

The nose-dive of most cryptocurrencies wiped nearly $140 billion off a total market cap of over $1 trillion as traders took profits on the spectacular rally so far this month in light of a stronger dollar and growing political uncertainty.

Investors will be keeping a close eye on the possible impeachment of President Donald Trump and a surge in cases of Covid-19 in Asia.

On Monday, Bitcoin, which is still up about 25 per cent so far this year, dropped 6.0 per cent to a one-week low of around $35,720 on the Coinbase platform, while Ethereum fell 12 per cent. Smaller coins XRP and Litecoin shed around 18 per cent each.

Bitcoin last week hit a record high above $41,000, swept up by a combination of a weaker dollar, economic optimism and a wave of bullish sentiment towards cryptocurrencies, as big-name investors and investment banks touted its potential for further spectacular surge.

With so many investors wanting to get rich on Bitcoin, the asset is drawing the attention of regulators. On Monday, the UK’s financial watchdog issued a stark warning for consumers looking to profit from crypto: be ready to lose everything.

Michael Hartnett, chief investment strategist at Bank of America Securities, said Bitcoin looks like "the mother of all bubbles," terming its recent rally as another case of sheer speculative manic.

Hartnett points out in a recent report that the dramatic rise in Bitcoin during the past two years - a surge of roughly 1,000 per cent since the beginning of 2019 - is far greater than the gains for other assets that have enjoyed massive run-ups in the past few decades.

That includes a surge in gold prices of more than 400 per cent in the late 1970s, as well as other notable investing manias: Japanese stocks in the late 1980s, Thailand's stock market in the mid-1990s, dot-coms in the late 1990s and housing prices in the mid-2000s. Those sectors all enjoyed triple-digit percentage gains before crashing down to earth.

The Bank of America analyst didn't predict Bitcoin prices will plunge per se. Instead, he cited the froth in cryptocurrency prices as yet another example of "increasingly speculative" investing behavior. He also warned of the increased interest in IPOs and SPACs for big unicorn startups.

“Time to take some money off the table,” Scott Minerd, chief investment officer with Guggenheim Investments, said in a tweet. “Bitcoin’s parabolic rise is unsustainable in the near term.” In late December, Minerd predicted Bitcoin could eventually reach $400,000.

True believers in Bitcoin argue the rally this time is different from past boom-bust cycles because the asset has matured with the entry of institutional investors and is increasingly seen as a legitimate hedge against dollar weakness and inflation risk. Others worry that the rally is untethered from reason and fueled by vast swathes of fiscal and monetary stimulus, with Bitcoin unlikely to ever serve as a viable currency alternative.

issacjohn@khaleejtimes.com