Let’s face it, if you’re an armchair investor facing a sudden cash crunch, your Bitcoin holdings are probably going to be the first to be liquidated, especially if others are running for the hills.
The second reason is that as the tide goes out the fundamental flaws of the cryptocurrency system become more exposed. In the good times, there is so much money pouring into the market that investors are more willing to overlook those critical weaknesses.
The first, of course, is that it was invented as a currency but doesn’t work as one because it is too volatile, therefore it is yet to be accepted into the financial mainstream, and probably never will be. It’s not like the pound or the dollar, it’s more like gold but at least gold is a physical asset, which brings us to the second.
Crypto is a solution in search of a problem and it has no underlying value. It can’t really be spent, it doesn’t produce a dividend like equities, it isn’t a precious metal or other physical commodity.
It is little more than a sea of numbers on a screen and it only really works if everyone agrees that those numbers have value but when that pact breaks, then the whole edifice starts to crumble, and the cracks are appearing everywhere.
The value of cryptocurrencies has crashed by more than half in the space of just six months. In the last month alone, $1 trillion (£820bn) of value has vanished.
By Thursday, Bitcoin had slumped to $29,000, a plunge of nearly 60pc. What seemed like a ripple, at first, threatens to turn into a rout that only professional and institutional investors stand a chance of riding out.
The 26pc slump in cryptocurrency exchange Coinbase was so sharp that it was forced to warn customers that their deposits weren’t protected if it went bust, a reminder that investors have no legal protections.
As the FCA was quick to remind people: “If you buy crypto assets you should be prepared to lose all the money you invest.”
Those fragilities have always existed. The key difference this time is that the infrastructure that is supposed to underpin the market risks becoming unstuck. So-called stablecoins are meant to be a safe haven from the fierce swings that characterise the rest of the crypto-universe because they are pegged to a conventional currency such as the dollar.
Yet two of the most popular – Terra and Tether – have become unpegged, causing wider panic and questions to be asked about the resilience of the entire market.
It may not be the death knell. Indeed the market staged a familiar rally on Friday. But as the world moves into a new era of reality-based finance, the idea that Bitcoin could one day topple the dollar as the world’s reserve currency seems more absurd than ever. Increasingly crypto looks like a house of cards.