Some of you may know that I have a history with bitcoin . When BTC/USD was below $500, I began writing positive articles about the subject. It was popular to label the entire thing a Ponzi scheme at the time. Several well-respected market experts who should have known better stated frequently that bitcoin was worthless, and would drop to zero in a year, a months, or any other time period that would catch the attention of the media. This is not because I am proud of my long-standing interest in the subject, but to give perspective.
First, I can’t believe you told me in 2014 that I was worried about bitcoin falling below $40,000 in eight years. This perspective is useful for those who bought at the $500 level. It is less relevant to recent converts. For them, it is more about the 40% decline from the highs in November than the huge gains over the past eight years. They see the most important aspect of long-term interest as the fact that we have been there before, and that bitcoin has proven itself to be a bargain at the big drop.
But, the world has changed in recent years and there are good reasons to believe that this drop might be a little different.
The chart doesn’t seem to show it as worrying. It is clear that although $40k may look like a nice round number, it does not have any pricing significance. In that sense, the $30k level is much more important. However, this level will not be reached if the situation doesn’t improve quickly.
Over the past eight years, a lot has happened in the crypto world. However, Wall Street and institutional traders have adopted the market, which has in turn changed the fundamental drivers of price. Prices rose back in the day because people believed in the long-term viability of bitcoin and the blockchain. Even though the outcome has been quite clear, it still has some weight. When looking at the prospects for next week, month, or year, other factors have a greater impact on the price.
Bitcoin’s popularity on Wall Street is due to its role as a proxy for risk. Although early volatility in bitcoin promoted this view, it can be argued that more was due to a design scarcity than anything. The simplistic narrative that bitcoin was dangerous because it was volatile, and volatile because its risk was high was accepted as fact. This ‘risk asset” profile is what is driving BTC/USD down right now and makes an extended period or weakness seem likely.
As long as the Fed keeps tightening, ‘Risk’ won’t be in fashion. It looks like the Fed will remain in a tightening mode for at least the remainder of this year. This would normally be bad news for stocks or commodities. But that might not be the case this time. Inflation is the problem that forced the Fed to take action. It was caused by massive liquidity, sudden demand outpacing Covid-related supply problems and tight labor market. While higher rates may slow things down, for the time being, consumers and businesses will continue to be able to access cash. Corporations will continue making huge profits and corporations will continue to make great profits. Prices of oil, lumber and steel will remain high until there is more supply.
Traders are now looking for something to buy to lower their risk profile. Right now, bitcoin is the best option. The immediate future of BTC/USD is not promising.
It all depends on how you view BTC and, to a lesser degree, when you started investing. There is still much potential for long-term holders of Bitcoin who see it as an emerging currency and a disruptive force. They should be able to ride out volatility they knew was coming and have seen many times before. You might even want to consider increasing your holdings, starting at $30k, if we reach key levels. However, if you view BTC/USD more as a swing trade, and are at best agnostic about the fundamental future bitcoin as a currency then it might be better to exit now than wait for it to crash.
Whatever one of these you might be, or whether you’re somewhere in between, the most important thing to do over the next few weeks is to maintain your own perspective when bitcoin makes headlines. BTC’s risk-related drops are not an indication that it is worthless or that there will be an inevitable move to the moon. This is due to the asset’s risk proxy role and an unusually low number of suitable ways to reduce portfolio risk profiles. These can be very powerful but not enough to cause panic.