As some of you may be aware, I have some history in these pages when it comes to bitcoin (BTC). I started writing positive articles on the subject in 2014, when BTC/USD was well below $500. At this time, it was fashionable among the ignorant to call the whole thing a Ponzi scheme and several well-respected market figures who should have known better said frequently that bitcoin was worthless and would go to zero within a year, a month, or whatever timeframe would grab the headlines. I mention that, not just to gloat, but also because while my longevity of interest in the subject doesn’t necessarily make my opinion on it now of more value than any other, it does give me perspective, something that is valuable as BTC/USD once again breaks below the $40k level.
For starters, if you had told me back in 2014 that in eight years’ time I would be worried about bitcoin dropping below $40,000, I would have laughed at you for obvious reasons. That is a useful perspective to those that bought around the $500 level, but less so to more recent converts, for whom this is more about the 40% drop from the highs last November than the massive gains over the last eight years or so. For them, the more important part of the perspective that long-term interest affords is that we have been here before and each time, bitcoin has shown itself to be a bargain on the big drop.
However, things have changed over the last few years, and there are reasons to believe that this drop may be a bit different.
It doesn’t look to be too worrying on the chart, where it is obvious that while $40k is a nice, round number, it has little or no significance from a pricing perspective. The $30k level is far more important in that sense. But, if things don’t change dramatically and quickly, that level will be in play before too long.
A lot has changed in the world of crypto over the last eight years, but one of the biggest changes has been the adoption of the market by Wall Street and institutional traders, and this change in turn has altered the fundamental drivers of price. Back in the day, prices rose because of a belief in the long-term future of bitcoin itself and the blockchain that was behind it. That still has some influence, even though it has already played out to a large extent. Other factors now have a much larger impact on price when looking at prospects for the next week, month or year.
Bitcoin has gained traction on Wall Street largely because it has become a proxy for risk in general. Early volatility in the asset promoted that view, although a strong case can be made that was down to a designed scarcity more than anything. Still the somewhat simplistic and lazy narrative that bitcoin was risky because it was volatile and volatile because it was risky passed into conventional wisdom. That “risk asset” profile is what is driving BTC/USD lower right now, and it is what makes an extended period of weakness look likely.
“Risk” will remain out of vogue as long as the Fed is in a tightening mode. And it looks like the Fed will be for at least the rest of this year. Traditionally, that would be bad news for stocks and maybe commodities, but that may not apply this time. The problem that has forced the Fed into action is inflation, born of massive liquidity, a sudden surge in demand meeting Covid-related supply issues and a tight job market. Higher rates will presumably slow things down a bit, but for a while, consumers and businesses will stay flush with cash, corporations will keep making great profits, and the prices of oil, lumber, steel, wheat, and almost everything else will remain high until supply increases.
That leaves traders looking for something to sell to reduce their overall risk profile, and right now, bitcoin is it. Because of that, the immediate future for BTC/USD does not look promising.
Whether that is a concern or an opportunity to buy lower depends on your attitude to BTC, and to a lesser extent, when you got involved. For long-term holders who see it as a massive disruptive force and an emerging global currency, there is still a lot more potential. For them, riding out the kind of volatility that you knew was coming, and have probably seen many times before, is the best option. Maybe you should even consider adding to your holdings if we get to key levels on the way down, starting with $30k. If, however, you see BTC/USD as more of a swing trade and have an at best agnostic view of the fundamental future of bitcoin as a currency, it may be better to get out now rather than be forced out lower at levels that will inevitably be hit just before a bounce.
Whichever of those you may be, or if you are somewhere in the middle, the important thing over the next few months will be to keep your own perspective each time bitcoin hits the headlines. A risk-related drop is not a sign that BTC is inherently worthless, nor is it a precursor to an inevitable move “…to the moon!” It is simply a function of both the asset’s role as a risk proxy and of an unusual lack of other suitable ways of reducing risk profiles in portfolios. Those can be powerful forces but they are not reasons to panic.