How many headlines of this kind have you seen after each Bitcoin price drop by more than 20%?
The last few months of solid growth have instilled confidence that Bitcoin is unstoppable. Each time Bitcoin updated its maximum and even managed to get close to the $60,000 mark. However, then its price fell sharply in a few days and for many investors it came as a shock… for some reason.
Is it really the end of the Bitcoin rally or it’s just a pause before another storm? Let’s try to figure it out.
Is the recent dip healthy for Bitcoin?
A distinctive feature of Bitcoin’s latest attempt to reach $60,000 was a significant decrease in trading volume in the spot market after overcoming $50,000. At overcoming this level, the trading volume on margin platforms has skyrocketed, so a lot of traders started buying Bitcoin with leverage. The price continued to move upward smoothly, but the volume in the spot market was decreasing. It made Bitcoin more susceptible to sharp price movements in both directions. And when the fall happened, it launched a chain reaction for margin traders and waves of liquidations followed.
As a result, more than $6 billion in margin positions were liquidated and it pushed the Bitcoin price down. The price dropped by 25% in just a few days and Bitcoin returned to levels where it was… a few weeks ago.
Some analysts say such a situation can be called healthy since it allowed Bitcoin to get rid of overleveraged positions. Moreover, the price correction after several weeks of steady growth also looks reasonable.
Are such “crashes” normal for Bitcoin?
This is not the first time in 2021 the Bitcoin price has dropped more than 20% in a short period of time. Not even the second one. And definitely not the last one.
But falling by 20% from time to time is not some kind of Bitcoin feature. Any asset, even in the traditional market, can face a sharp drop. Especially after the rapid and steady growth over several weeks or months that Bitcoin experienced recently. Such a correction is more likely a logical reaction to such a strong rally, as some investors may start profit-taking.
Bitcoin is at the beginning of its development and is only forming its value. It means that it’s still quite a volatile asset. However, for those accustomed to traditional markets where a 3% drop is already an event, a 25% drop is a real crash. Therefore, it is not surprising that after such sharp movements, some mainstream media declare Bitcoin dead or unsustainable.
Some experienced crypto enthusiasts may laugh at those who claim that “Bitcoin is dead”, especially when the price gets higher and higher over the years. In 2011, the Bitcoin price plunged from $32 to $2.37 (more than 90%) and Wired wrote an article “The Rise and Fall of Bitcoin”. In 2014, Bitcoin was buried at $325. In 2018 analysts wrote obituaries when the price was $6,000.
Price correction occurs eventually and sometimes it reflects the justification of the previous growth.
May the Bitcoin rally continue?
Nobody knows what the Bitcoin price will be in the short term. Many compare the current rally to the 2017 crypto boom, and this is partly justified. However, 2017 is mainly famous for the ICO boom, when retail investors invested in everything that was somehow connected with the words “cryptocurrency” and “blockchain”. While the 2020-2021 rally is more stimulated by the decline in the US dollar’s purchasing power, pandemic, and the economic situation in the world. Besides, Bitcoin faced increased interest among large investors as a protection asset against inflation and store of value. Another fundamental reason for the current Bitcoin rally is halving that took place in May 2020. As history shows, Bitcoin experiences rapid growth for 1-1.5 years every time after halving. This was the case in 2012-2013 when the price increased
from $12 to $1,150 and in 2016-2017 — from $650 to $19,500. The latest halving started at $ 9,000, but the top remains unknown.
Some crypto enthusiasts call Bitcoin a cyclical asset because of that and expect the price could hit $100,000 sometime in 2021. But it is worth noticing that each time a long-term correction occurred after a rapid rally. And then investors quickly start looking for where to sell BTC online. Bitcoin price cannot rise all the time and sometimes deep corrections occur. Throughout its history, Bitcoin has proven more than once that it can withstand even more serious falls. While in the short term there is uncertainty about the Bitcoin price, in the long term Bitcoin has so far shown confidence in its future.