TOKYO -- The price of bitcoin, the world's most traded cryptocurrency, plunged 30% on Friday amid widespread market turmoil -- defying expectations from some advocates that cryptocurrencies would withstand shocks in traditional financial markets.
The selloff ended a months-long crypto rally that accelerated in January after tensions rose between Iran and the U.S., and peaked in February when the price of bitcoin surpassed an all-time high of $10,000. On Friday bitcoin was trading at around $5,000 while Ethereum, the second-most used cryptocurrency, fell as much as 49% to trade under $100.
Crypto holders had been waiting for the worst day for markets in 12 years to test the theory that bitcoin, a decentralized currency created in the aftermath of the 2008 recession, would be resilient to financial shocks. After a prolonged economic expansion, the day finally came on Monday.
"I was surprised because I expected BTC to behave like gold, in that people would put their money into it when there was a crisis," said Michael Streeter, a cryptocurrency holder.
Analysts and long-time holders of cryptocurrencies have been warning since the January spike against expectations of bitcoin becoming a safe haven. Christopher Flinos, trader at Abu Dhabi-based Hayvn Capital, said bitcoin was proving to be a portfolio diversifier.
"I don't think Satoshi created it so it would just be a diversifier," Flinos wrote in a blog post, referring to bitcoin's anonymous creator who is known as Satoshi Nakamoto. "But its trading pattern and its movements in times of crisis betray it."
Other anaylsts said cryptocurrencies need longer to show any safe haven qualities like gold, dollars or Japanese yen.
"For returns, it's one of the best assets in the past 10 years, but bitcoin has only existed for little more than a decade," said Nemo Qin, senior analyst at eToro, an investment platform.
Instead of surging inversely against the market, as a safe haven should, bitcoin did not see any gains. Losses across the crypto market were triggered by retail participants cashing out to hedge against losses in traditional assets.
But long-term holders and traders, for whom bitcoin adoption is more important than its price, expect this week's losses in crypto and traditional markets to pay off in the long-term.
"People often think that bitcoin is an asset to use as a hedge. Most people just use it as a method of payment," said Qin of eToro.
"Bitcoin's test will be surviving this," said Nicklas, a long-term cryptocurrency user. "In a crisis like this, Bitcoin can prove its value" because it can be sent and used immediately around the world with little to no fees.
Crypto holders are looking ahead to May, when an event that occurs every four years known as the "halvening" is scheduled into bitcoin's algorithm. Currently, 12.5 bitcoin are mined every 10 minutes, and this year's halvening will decrease that to 6.25 bitcoin. As a result the cost of production will double for bitcoin miners, who will begin to charge more. Whether or not buyers pay the price will determine the halvening's effect on bitcoin's value.
"People may think it's a good time to buy now while the price is low if you want to profit from the halvening, but there's also a risk that the halvening won't be as big of a gain as people expect and start selling off," said Qin.
A boost from the halvening coupled with global market conditions in the first half of this year may set up a rally. But bitcoin's price could still be grounded by excessive leverage and the lack of capital coming in from traditional markets.
"If halvening doesn't put it back to where it should be, I will not withdraw my money, but I'll be looking to spend some of it as bitcoin," said Streeter. "I can't invest any more than I have. It's been tanking monstrously."