The price of Bitcoin, the world’s leading cryptocurrency, crashed by more than 50 per cent during one week in May, and continued to fall in June, shedding the gains made from its remarkable rise since the beginning of the year. What might explain the price plunge? First, a tweet from Elon Musk on 12 May stated that Tesla would no longer accept Bitcoin for vehicle purchases owing to concerns around fossil fuel energy consumption – a 180-degree turnaround from his position at the start of 2021.
Second, Andrew Bailey, the governor of the Bank of England, warned in May this year that cryptocurrencies were a danger to the public, saying: “I’m sceptical about crypto assets, frankly, because they’re dangerous and there’s a huge enthusiasm out there.” (Last month, the UK’s financial regulator, the Financial Conduct Authority, banned Binance, a major crypto exchange, from regulated activity in the UK.)
Third, the Chinese government announced a crackdown on Bitcoin “mining”, the computing process that uses cryptography to produce new Bitcoins and secure the overall network. This led to Chinese miners – who account for around 75 per cent of the Bitcoin computational capacity used to secure the network – dumping the cryptocurrency and adding to the negative sentiment.
It is human nature to create reductive stories to help us comprehend the complexity and uncertainty of the world. However, in the case of markets the prevailing “narrative” is often something that rationalises market behaviour after the fact, rather than giving an accurate summation of