Bitcoin price crashed after touching US$42,000 – and that’s okay

Posted: 15 January 2021 3:40 pm
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Newcomers to the market may have been scared by today's US$12,000 move, but history says it's normal.

  • The price of Bitcoin was as high as US$42,000 and as low as US$30,000 in the past 48 hours.
  • History shows large dips are normal during periods of rapid price discovery.
  • News of institutional investment and government approval of blockchain technologies continues to roll in.

After scaling up to its all-time high of US$42,000 on 8 January, Bitcoin recently slid by almost US$12,000 down to just above US$30,000 in the past 48 hours – a whopping loss of 28.5% before recovering to the $35,000 mark at the time of writing. Those who have been in the market for years will understand that dips like this are normal, however, this time around the numbers involved are much larger, which may be especially frightening for newcomers.

How to buy Bitcoin

A number of market indicators had been pointing in the direction of the flagship cryptocurrency facing some sort of pullback. The most likely explanation though is simply that many investors were looking to lock in profits after a historical ascent saw Bitcoin double in value from $20,000 to $40,000 in less than a month.

History says it's FINE

If the past decade has taught us anything, it is that sell-offs during a bull run can often become overextended, mainly because traders tend to look for reasons to offload their assets during such cycles. As a result, overleveraged buyers get caught at local tops, resulting in massive liquidations. In this regard, Avi Felman, head of trading at BlockTower Capital, pointed out:

"Extended selling at the local bottom for the first time this rally suggests to me that retail is slowly picking up. Pullbacks in bull markets always hand you a silver platter of reasons to sell."

For example, on 26 November, Bitcoin's value dropped from $19,300 to $16,327, representing a 10% drop within a period of just 24 hours. However, as we all know now, in just a couple of weeks, the currency proceeded to smash its all-time high, scaling up to a price point of $22,000 by 17 December, before beginning the new year above $30,000. Similarly, on 12 June, the premier currency dropped from $9,700 to $9,100 (showcasing a 6% drop) only to make a swift comeback a month later by crossing the $10,000 barrier.

Here's why there's no need to panic

Even though Bitcoin's price may have dipped recently, there are a number of positives that cryptocurrency enthusiasts can look towards for reassurance. For example, institutional money is still flowing into this space, with investment into the Greyscale Bitcoin Trust increasing to $16.4 billion in December 2020, JP Morgan forecasting a $146,000 Bitcoin price, and a US regulator approving the use of blockchain technology for payments between banks.

Secondly, many quantitative traders have pointed out that a lot of the current demand for premier cryptocurrencies seems to be coming from North America, which is a positive sign as far as the future valuation of BTC goes. Lastly, as per the Time-weighted Average Price (TWAP) algorithm, a trading metric used by many mainstream institutions and funds for tracking the value of various premier cryptocurrency assets, demand for BTC will continue to rise in the near future, especially if institutional investors continue to enter this relatively nascent market sector.

Interested in cryptocurrency? Learn more about the basics with our beginner's guide to Bitcoin, keep your crypto safe with a hardware wallet and dive deeper with our simple guide to DeFi.

Disclosure: The author may own a range of cryptocurrencies at the time of writing

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Picture: Getty

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