Sell-off proves bitcoin is no Shmoo

Last year bitcoin was presented as a financial cure-all. New money. Digital gold. A hedge. Now we know it’s none of these things.

Are you familiar with the Shmoo?

The Shmoo was a cartoon creature that popped up in an American comic strip that was first published in 1948.

The Shmoo was a loveable creature that looked like a bowling pin with legs. It laid eggs and gave milk.

Unlike the real-life animals we’re familiar with, it loved to be eaten and could taste like any food you fancied.

No part of the Shmoo went to waste. Its hide made fine leather, while its whiskers could be used as toothpicks.

Basically, the Shmoo supplied all of the world’s needs.

Last year, the world of finance had such a Shmoo. Bitcoin could be everything to everyone.

Some people hailed it as the future of money. Central banks’ days were numbered…

Other people saw it as a form of digital gold. It served as a store of value for investors to park their money.

Still others bought it as a hedge. Since it was no part of the traditional financial system, bitcoin would protect investors against a market crash.

But this year has proved that bitcoin is no Shmoo.

Illusions shattered

This time last year, bitcoin was going from high to high.

The cryptocurrency markets were booming. One initial coin offering after another got promoted as the new bitcoin.

Celebrities like boxer Floyd Mayweather and socialite Paris Hilton jumped on the crypto bandwagon and made a quick buck by giving their seal of approval to various obscure coins.

As more and more people bought into the cryptocurrency craze, the legend of bitcoin spread like wildfire.

Satoshi Nakamoto, the anonymous brain behind bitcoin, had created the digital money to escape government control and end our reliance on banks.

It was the people fighting back against the system. Bitcoin was taking matters into our own hands. A currency of the people, by the people, for the people.

If that was truly the reason behind bitcoin’s popularity, I doubt its value would have fallen so much this year.

The simple truth is that people discovered something that seemed to make other people a lot of money and wanted to be a part of it.

It’s the only logical explanation for investors abandoning bitcoin in droves this year now that the spell is broken.

The once-mighty bitcoin currently trades around $4,500 per coin. That’s about 77% lower than its all-time high of $19,800 of December last year.

As long as the price of bitcoin was going up, nobody was particularly concerned about its many flaws.

For example, its extreme volatility made it fundamentally unsuitable as a method of payment…

There seemed to be no technological upgrades in order to make the cryptocurrency cheaper, faster, and more secure…

Never mind that bitcoin mining consumed more electricity in a year than the whole country of Ireland and therefore wasn’t doing the environment any good either.

A lot of the illusions people had about bitcoin have already been shattered. But up until recently, there was still one myth left to be debunked…

Digital gold

Bitcoin has been dubbed by many as digital gold. It was seen as a great hedge against the financial system.

An inverse relationship between bitcoin and the stock markets was implied. Once stocks would sell off, investors would flee to bitcoin as it was disconnected from the wider financial world that includes stocks and bonds.

It was hard to counter this argument last year for a very simple reason: markets were going up, not down. And bitcoin was going up at the same time, which already hinted at a positive rather than a negative correlation.

Still, only in a market sell-off would we truly know how bitcoin holds up in a crash.

Bitcoin was thought of as a new kind of gold – something investors would flee to once stock markets got rockier.

When the stock markets are going up, the gold price tends to fall or stay flat. Why put money in a non-yielding asset class, when there are opportunities abound to get decent yields investing in stocks or bonds?

Bitcoin bulls pointed to the cryptocurrency’s independence from the financial system. It wasn’t plugged into the mainframe of the global capital markets. As such, it was a hedge against any stock market turmoil, just like gold.

Even better, the price of bitcoin could rise much faster than gold. So it was a hedge that would make you money.

All we had to do was wait for a market sell-off to prove this inverse relationship between stocks and bitcoin.

Ironically, evidence of an inverse relationship between stocks and cryptocurrencies did surface this year. Just not the kind of evidence that bitcoin investors had hoped for.

Bitcoin and virtually all other cryptocurrencies sold off hard this year, while stock markets went on to reach new highs.

The stock sell-off of the past few weeks finally put the last illusion about bitcoin to bed. No way bitcoin can be considered a hedge.

Writes the Wall Street Journal:

“Investors often assume cryptocurrencies aren’t connected to the wider markets. But many are discovering the same central-bank-fuelled dynamics that drive stocks have an effect on crypto markets as well.”

As stocks sold off, cryptocurrencies followed them into the abyss. Just about every cryptocurrency was in the red. On Monday, bitcoin fell below $5,000 for the first time in over a year.

Bitcoin is no Shmoo, and never will be.

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