Is Bitcoin Dead?

Elizabeth Laprade, CFA

Senior Research Analyst

Is bitcoin dead? Its price is down almost 60% year-to-date and it’s a similarly sad story for other digital currencies. On top of poor performance, the year has been riddled with negative news about cryptocurrency security and potential regulatory oversight. Just this week, Treasury Secretary Janet Yellen released a report asking Congress to legislate tighter regulations over digital asset trading.

Additionally, there have been large-scale layoffs at crypto firms and we’ve seen some serious flaws exposed in parts of the system as prices sank—the bankruptcy of crypto lender Celsius in July being the most notable sign of distress.

That said, all is not lost in crypto land: Last month, NASDAQ announced plans to act as a custodian for bitcoin and ethereum on behalf of institutional investors, and other larger financial institutions are lining up to offer similar services.

The fact that institutional adoption hasn’t evaporated is one key difference from prior crypto crashes. As for price performance, there are still some positive signals. I looked at bitcoin’s relative strength index, which tries to measure the rate at which the asset is selling, with below 30 being oversold and over 70 being overbought. What I found was that if you bought bitcoin every time its relative performance sank below 30 over the past four years, your average one-year return was 38%.

Now, that comes with some massive caveats, most notably that the drawdowns over the full period from 2011 to today have gone as low as 93% and buying on the way up would require more than a little market-timing magic.

In summary, it’s been a rocky road for crypto bulls this year, but that’s nothing new. I can’t say for sure that we’ve seen the bottom in prices—regulation, interest rates and distressed crypto-related firms are all huge headwinds. But crypto optimists are holding out hope for a bright future (and Fidelity clearly sees a market; it launched an ethereum index fund for accredited investors at the end of September). History shows us that it may pay to hold on to your coins as long as you can afford some big drawdowns along the way.

So is bitcoin dead? I’ll stick to my usual digital-asset disclaimer: Don’t invest more than you can afford to lose.