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Bitcoin is Facing the ‘Moment of Truth’, Says Allianz Economist

Last Updated March 4, 2021 5:03 PM
Josiah Wilmoth
Last Updated March 4, 2021 5:03 PM

A top economist at one of Europe’s largest asset management firms said that he believes bitcoin is facing its “moment of truth” as it endures its first significant correction since the launch of bitcoin futures contracts earlier this month.

Bitcoin at ‘Defining’ Juncture

Mohamed El-Erian, the chief economic adviser at Allianz, wrote in a Bloomberg op-ed  that, following a banner year that has seen the bitcoin price rise to nearly $20,000 after entering January at $1,000, the market finds itself at a “defining” juncture.

Since reaching an all-time high of $19,891 on December 17, the bitcoin price has entered a severe corrective phase. At the time of writing, bitcoin was trading at $14,078, according to the CCN.com Bitcoin Price Index, a decline of 29 percent from its all-time high.

Though not outside bitcoin’s normal range of volatility — the market pulls back by 30 percent approximately once every two months — this is the largest correction since U.S. exchanges CBOE and CME launched bitcoin futures contracts. Consequently, El-Erian wrote that this downturn carries particular importance for bitcoin’s future.

“Either this sharp price correction will act as a catalyst for expanding what, until now, has been quite limited institutional involvement in this market — or it will become a stage in the deflation of a remarkable and historic asset bubble,” he said.

Bitcoin Risks Becoming a Historic Investment Bubble

The former PIMCO chief executive, who argued in September that the flagship cryptocurrency’s fair market value lay between $1,300 and $2,000 — about one-third of its value at the time — explained that, to date, bitcoin has been buttressed by a small but dedicated investor base. He also alleged that, with the exception of China, bitcoin has attracted less government intervention than one would expect.

However, this latter claim glosses over the fact that at one time, mainstream financial analysts said that a Chinese regulatory crackdown would deal bitcoin a deathblow. That, of course, was not the case, and cryptocurrency prices rose dramatically in the months after China banned cryptocurrency trading.

Referencing this breakneck climb, El-Erian said that a “healthy” correction would remove the “irrational exuberance” from the market, provide institutional investors with an attractive entry point, and widen bitcoin’s investor base.

“Absent this,” he warned, “not even the deep commitment of true believers will be enough to protect individual retail investors who would end up experiencing a price appreciation and collapse that would rival even the biggest investment bubbles in history.”

Featured image from Shutterstock.