What happens when a financial product is based on intense technical foundations that many find difficult to understand goes mainstream? Well, that is what always happens when you invest in something you don’t fully understand. Crypto has a similar story. Yes, prices did exceed $50,000 but it came tumbling down to $30,000 over a single tweet from an influential CEO. Let’s understand what went wrong with crypto and whether you should buy the dip or ignore the market.
The Rise
Crypto investors rejoiced on 10th April, 2021 as Bitcoin (BTC) peaked an all-time high of $60,000 after trading bearish since the start of the month. This resulted in an all-out price hike across the crypto space with ETH trading 4.7% higher at $2,173. All of this signalled that a more stabler time was on the horizon for BTC making it or any other crypto for that matter more suitable for use as currencies.
The rally happened to an extent owing to the rise in institutional demand and passing of the $1.9 Trillion stimulus package resulting in a 30% rally for March 2021 alone. As per technical research conducted by investment firm Kraken at that time, given BTC’s March end price of $58,786 and from historical data if the crypto closed 256% higher through Q2 of 2021 as it has done year-on-year since 2008 one could reasonably expect the coin to trade $209,000 as of 1st July 2021.
Even if we resorted to lowball figures at that time, using median Q2 returns of 39.2% which paints a more realistic growth figure we see that BTC was slated to stand at $82,000. Kraken also postulated that ETH would rally 141% in the same quarter trading at $4,623. So where did things start getting downhill?
The Musk Factor
Even though there are factors other than just Elon Musk’s mindless tweeting behind the eventual plunge in crypto prices, the intense panic selling starting with Tesla CEO Elon Musk announcing that Tesla will no longer accept BTC as a currency for buying its vehicles on account of BTC not being environmentally friendly.
In addition to this news, China’s decision to put crypto in an inescapable chokehold resulted in the prices of BTC plunging near $36,000 through volatile market swings shedding more than half its value since hitting its all-time high of $64,000.
Bullish movements were met with Nasdaq underperforming by more than 1.5% the rest of the market following, apart from that massive panic sells resulted in clogging of order flow on trading platforms such as Binance and Coinbase. Charles Schwab’s Chief Investment Strategist, Liz Ann Sonders quotes-
i think the carnage is more because there’s so much more adoption, especially by the retail world
This coincides with a steady move from riskier and largely untested asset classes such as crypto to traditionally safer stores of wealth such as Gold Equities and Treasury bonds as stated by JPMorgan Chase’s analysts
what is striking is that the recent outflows from bitcoin funds have been accompanied by inflows into gold etfs in a reversal of the last quarter of 2020 and the beginning of this year
Recovery in Sight?
In order to answer whether BTC will reach its pre-crash levels one must understand the nature of Crypto as a whole and what the technology means for the future. Whether blockchain will facilitate the currency of the future is immaterial. However, blockchain so far as one can see is more likely than not a technology that will facilitate tomorrow’s ventures by more means than just one. With the rise of Decentralised Applications and Decentralised Finance, there is without a doubt a massive industry that will develop around the technology as it matures. So, we are going diamond hands. Are you?