The value of bitcoin fell 20% in December, but should investors worry?

Between the third and fourth of December, 2021, the value of bitcoin went from $57,300 to $45,000. The 20% drop affected the market capitalisation of digital assets significantly.

Since the introduction of bitcoin, instances of market failures e.g., the bankruptcy of Mt. Gox bitcoin exchange in 2014, and the initial coin offerings burst in 2017 have led to an inherent price volatility that leaves investors sensitive to sudden and negative value changes.

The volatility of bitcoin reached 3.33%, estimated for the latest 30 days on December 29, 2021, according to Buybitcoinworldwide.com. Bitcoin’s volatility has been historically much higher and has reached record levels several times. Bitcoin volatility was at 16% in June 2011, 15% April 2013, 12% December 2013, 7.7% January 2018, 10,8% March 2020, and 6% March 2021. Several of these instances correlate with major price drops and adjustments of bitcoin´s market value.

While regulatory advancements and market principles can eliminate instances of market failures, price volatility remains an issue due to the speculative nature of the trade. Should investors worry?

Currently, some 15,000 plus cryptocurrencies, 400 decentralised finance (DeFi) protocols, 700 non-fungible tokens (NFTs), and hundreds of stablecoins are available for trading. Together these assets were valued at $2,35 trillion on 27 December, a drop from the record valuation $2,9 trillion on 8 November and a substantial (~300%) value appreciation since January 2021. Since, 4 December bitcoin has recovered part of the value drop and was valued at $50,000, on 27 December, 2021.

Moreover, the debate on volatility is typically general and excludes differences among the various expressions of digital currencies. Shufflup.org ranks 2,200 coins and presents in a benchmark on 27 December 2021, that Tether had the lowest volatility (0.09%) and 404Coin had the highest volatility (169%) measured on an annual basis.

Some recent institutional recognitions of bitcoin might reduce price volatility in the short-term perspective. El Salvador announced in September 2021 that it will be the first country to adopt bitcoin as a legal tender. Moreover, the Houston Firefighters' Relief and Retirement Fund, announced in October its $25 million investment in bitcoin and ether. The US-based fund has some 6,600 active and retired fighters and holds $5.5 billion in total assets. Together with the US based Fairfax pension fund they are among the first US-based pension funds to go crypto.