For any asset or security, its price cycle is characterized by four distinct phases:
This is the natural price cycle of any market and is important for the growth of the value of an asset in the long term. Returns are never linear in the market and therefore, what goes up, must come down. The massive drop in the price of Bitcoin and other crypto has roiled investor sentiment, but the move is not sudden or due to someone going back on their decision to halt accepting Bitcoin for payments.
A Natural Course Correction
If many technical analysts are to be believed, Bitcoin was clearly overbought and looking for triggers to fall or correct itself.
If anything, Elon Musk’s tweet and China’s ban of digital tokens in financial transactions acted as the catalyst for this massive drop.
Take a look at the daily chart for BTC/USD given below.
It’s in the RSI
The RSI or relative strength indicator is a very important technical indicator for traders to gauge the bullish or bearish price momentum. It tells you if an asset is overbought or undervalued.
An RSI above 70 is considered to be overbought and oversold when it is below 30.
In the chart above, you can see that the RSI had begun its downward trend since Jan 2021, when Bitcoin crossed the $ 40,000 level. If anything, this was an inevitability waiting to happen.
New Investors and Their Fears
Another factor that played a major role in this selloff is the exit of first-time investors from the market.
The recent surge in the price of cryptocurrencies attracted a lot of first-time investors into the market, but as sell-off picked momentum and losses ballooned, the first time investor started exiting the market in a panic to protect their capital.
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Bitcoin- The Path to Recovery
Bitcoin is still trading 300% higher compared to the levels it was trading a year ago.
The pullback from its recent peak of $63,729.5 is a small blip, given the huge growth potential it has.
In the previous market rout, when the price of Bitcoin retracted from $20,000 to near $3,500, everyone kind of wrote it off.
Take Tesla with a Pinch of Salt
Elon Musk and Tesla have endorsed and rejected as a means to pay for their vehicle. This has gone a long way in impacting investor’s sentiment negatively and has also shaken the crypto ecosystem, which aimed for increased mainstream adoption.
However, investors should keep in mind that Tesla’s decision was purely due to the company’s commercial interest that could have impacted its plan to remain profitable.
In fact, for most investors, taking Tesla with a pinch of salt goes a long way in matters of crypto investment. Elon Musk is already exploring reconciliatory measures with the crypto industry.
JP Morgan: Playing Both Sides
A recent report by JPMorgan suggested that many institutional investors are moving away from Bitcoin in favour of gold, but has not mentioned the reason for this move.
On the flip side, JP Morgan continues to maintain a long-term bullish stance on Bitcoin and has stuck to its previous forecast of $140,000 in the long term.
However, given the broader weakness in the market, it is difficult to predict the trend reversal. Many experts suggest that the selloff is healthy for the market, as Bitcoin continues to move to the strong hand from the weak, meaning old hands are accumulating in this dip.
Extreme volatility in cryptocurrencies is not a new phenomenon but is the most defining characteristic. The very characteristic that helps it to grow in value and beat every other asset class in terms of return. For instance, Bitcoin grew from $20,000 to $63,729, in less than four months.
In the cryptocurrency market, there will be a period of muted growth, extreme bearish trends, but the long-term outlook remains bullish.