Why are Cryptocurrencies dropping?
So what
Bitcoin prices have largely been skyrocketing since early October 2020, rising from roughly $11,000 to more than $40,000 per token in a three-month span. Since reaching a peak on Jan. 9, bitcoin prices have meandered over the last week and a half. There was a big drop on Monday, Jan. 11, and a fairly steady climb back up during the rest of this week. Token prices nearly reached the $40,000 benchmark again before tumbling again today.
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Cryptocurrencies have gained the attention of large investment firms this year, a major reason behind bitcoin's big gains in recent months. At the same time, the big names can cause sudden price drops from time to time. Today, investment firm UBS Global Wealth Management reminded investors that the bitcoin rally could end in tears. Cryptocurrencies are risky and volatile, and investors could end up losing everything they put into this unproven asset class.
"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," UBS analyst Michael Bolliger wrote.
That was enough to cause a sobering price drop that also hamstrung many stocks that had been following bitcoin upward.
Image source: Getty Images.
Now what
Bolliger is right, of course. The regulatory framework for cryptocurrencies is still evolving, which adds to the market uncertainty. Investing everything in a single cryptocurrency is a very bad idea, because a better version really could replace bitcoin at the top of the heap. I'm not saying that this will happen but the risk is not zero percent. If you're investing in cryptocurrencies today, it's probably best to divide your holdings between bitcoin and a few other respectable names such as Ethereum and Litecoin. All the major names happen to be falling today, but their performance can vary widely from time to time.
Don't cry for the bitcoin specialists, though. With the exception of the micro-cap Ebang International, all of them have performed extremely well during the current bitcoin boom. Grayscale Bitcoin Trust gained 347% over the last 52 weeks and MicroStrategy rose 331% over the same period. CleanSpark's stock posted a 614% gain. And if you thought those results were impressive, we haven't even talked about Riot Blockchain's 1,964% return or Marathon's crushing 2,374% gains. All of that is after going through Friday's significant haircuts.