Source: BitcoinMagazine.com
Bitcoin: The Moment Of Truth Has Arrived After nearly a year-long bear market, coupled with months of declines that had brought Bitcoin ( BTC-USD ) down by 70%, the world’s most famous digital asset has entered a new meltdown stage. Bitcoin has lost an additional 33% of its value in recent days, dropping to just $4,300, bringing the cryptocurrency’s total decline to 78% from its high of $19,500 achieved late last year.
Bitcoin 1-Year Chart
Source: BitcoinCharts.com
Incredible skepticism, sell volume, fear and panic have gripped the cryptocurrency markets once again.
Digital assets are seemingly melting away, one faster than the other, as sentiment sours to its lowest levels in years.
Naturally, investors have a lot of valid questions. Was this just a bubble to begin with? How low will Bitcoin go? Is now the time to step in and buy, or is it better to simply observe the carnage from the sidelines?
Bitcoin’s relatively brief history has taught us a few things.
You should never count Bitcoin out, especially long term. Unexpected setbacks spring up from time to time, ones quite capable of seriously rattling the market at times. Similar percentage drops have happened, and contrary to what many market participants may believe are the norm and not an exception. Bitcoin sentiment has a tendency to turn on a dime. Bitcoin is likely to rise from the proverbial ashes once again, just as it has after prior bear market declines before. A Look Behind the Declines What is with these drastic declines in the first place? It seems like everything was so calm just a week ago. Bitcoin was enjoying one of its quietest and least volatile time periods in its history, and then, seemingly out of nowhere, everything in the cryptocurrency markets blew up.
Bitcoin is not alone in its meltdown, and although Bitcoin’s price is down by 15% in the last 24 hours (at the time of writing this article), some other prominent coins are faring even worse.
In fact, all the major coins are collapsing, Ethereum ( ETH-USD ) is down by 15%, Litecoin ( LTC-USD ) is crashing by 13%, Dash ( DASH-USD ) down by 12%, and so on.
If we look at some of the lesser known coins, many are down by 20-30%, or more. It appears that if you were looking for panic to materialize in the cryptocurrency market, this is the day. The entire cryptocurrency complex’s market cap has collapsed to under $150 billion for the first time in over 1 year.
This represents about a $60 billion drop in just a few days and about an 80% decline from the all-time highs of over $800 billion reached earlier in the year.
Cryptocurrency Complex Total Market Cap 1-Year
Source: CoinMarketCap.com
Which brings us to Bitcoin Cash ( BCH-USD ), which was down by roughly 50% intraday before recouping some of its losses over the trading session. Incidentally, Bitcoin Cash is largely responsible for the across the board declines in the entire crypto space this week.
Bitcoin Cash Price Since Inception
The Bitcoin Cash Fork: A Very Messy Business Bitcoin Cash was supposed to go through a routine hard fork protocol upgrade on November 15th.
However, certain members ( Craig Wright ) of the Bitcoin Cash community could not agree on the specific trajectory of the Bitcoin Cash project. Therefore, a split in the blockchain occurred, and two competing currencies emerged, Bitcoin ABC and Bitcoin SV. This led to one currency vying for dominance of the Bitcoin Cash network over the other, and all chaos broke out.
This is not typical, and prior forks from the “original” Bitcoin like Bitcoin Gold, and Bitcoin Cash were done in a very civilized, and mostly consensual manner. This time it was not, as the leader of the rogue Bitcoin SV project Craig Wright, essentially threatened to implode Bitcoin , and thus the entire cryptocurrency complex.
Selling off Bitcoins to Support SV
Craig Wright is the self-proclaimed Satoshi Nakamoto , although many, including myself, are extremely skeptical of this claim. However, what is clear is that Mr.
Wright has a lot of Bitcoins. It’s difficult to say how many for sure, but maybe, 500,000, maybe a 1,000,000 , maybe more, which even at current market value makes him a billionaire several times over.
For whatever reason Mr.
Wright is exceedingly intent on the Bitcoin Cash protocol going his way, so much so that he has threatened to crash the price of both Bitcoin Cash and Bitcoin to get his way.
Well, it appears that Mr. Wright is getting exactly what he wished for, as prices of just about all cryptocurrencies are plummeting.
Flat out Selling of Bitcoin
There has been a lot of selling in Bitcoin in recent days. In fact, we’ve witnessed some of the heavyset selling in history on no news aside from the BCH split.
There is almost no doubt that Craig Wright, a major Bitcoin Wale and those in his camp have been dumping Bitcoin to create instability in the market and to fund their failing hash war Bitcoin Cash.
In order to wage a hash war, the splitting fractions need to implement an inordinate amount of hash power and mine an enormous number of tokes far below cost. Naturally, this requires an immense amount of capital, and a logical way to raise it is to simply dump Bitcoins on the open market. This is very likely one of the primary reasons behind the recent price decline.
Taking Hash Power Away from Bitcoin
The major forces involved in this dispute have utilized large mining pools under their control to divert hash power from Bitcoin .
Instead of powering the Bitcoin network, they are diverting substantial hash power to essentially wage a war for dominance over the Bitcoin Cash network. This phenomenon is also very likely proving to be detrimental to Bitcoin’s price in the short term.
Uncertainty Leads to Instability and Instability Leads to Fear
People don’t know what is going to happen to their Bitcoin Cash tokens.
This isn’t like Bitcoin’s prior forks where things were well telegraphed, and there were essentially no detrimental effects. For starters, Bitcoin Cash has crashed by about 60% inside of a weak, and this doesn’t inspire confidence in an investment vehicle.
Additionally, the Bitcoin SV protocol has very little support in the community and can almost be perceived as a rogue currency. Also, some market participants are not sure how to get their SV coins. Theoretically, Bitcoin ABC should retain Bitcoin Cash’s place, and 1 additional SV coin should be issued for every BCH/ABC coin. However, some exchanges are not supportive of SV , some hard wallets require some type of software addon, etc. The situation is a mess to put it lightly.
If One Rogue Faction Can Cause This, What’s Next?
Some people are fearful, and rightfully so.
If one person, or a group of people, with a selfish and destructive mentality can cause tens of billions of market value to be wiped out in just days, what’s to stop this from happening again? The crypto space remains a loosely regulated field, which in many respects resembles the Wild Wild West, and it is unclear what threats can pop out of seemingly nowhere, like this latest predicament.
Technical Levels Breached
Another factor that cannot be ignored responsible for exacerbating declines is Bitcoin’s technical levels being breached. The large wave of selling likely brought on by panic, stop-outs, and other forces took Bitcoin below crucial support of $5.8-6K, and then below $5K.
Bitcoin trades mostly on sentiment and technicals, and both are badly bruised right now.
Source: CCN.com
Deterioration in Sentiment
All the underlying factors mentioned above, coupled with other concerns like the need for cryptocurrencies in general, Bitcoin’s scalability issues as well as other anxieties have brought sentiment down to extremely low levels, and when sentiment deteriorates, people sell due to fear of losing more money and the price cascades lower.
Sentiment: Peak Pessimism and Capitulation This brings us to the next point, which is the point of peak pessimism and capitulation.
Is this the level of peak fear, capitulation, and rock bottom sentiment? It could be. To be honest, I was waiting for a moment like this, for something to essentially blow up in the cryptocurrency market, to signal that the point of maximum pessimism and fear was in. This event may be it, and it would not surprise me if it essentially marks the bottom in this Bitcoin bear market.
The Good News Bad News
The good news is that Bitcoin ABC, fundamentally, the original Bitcoin Cash camp is winning , and many insiders and exchanges have already proclaimed that it won.
In a best-case scenario, Craig Wright and his forked Bitcoin SV, along with his industry influence will disappear into irrelevance over time. Also, the negative effects brought on by this unfortunate incident, while likely to stay with the market for some time, are still likely transient in nature.
The bad news is that this fiasco has caused a lot of damage, capital, and sentiment wise. Also, it illustrates just how vulnerable the entire crypto ecosystem is to chaos arising seemingly out of nowhere.
It would be constructive to see some safety protocols put in place that ensure such instances can be avoided in the future.
Don’t Bet on a Swift Rebound
In part, due to the recent mayhem inflicted on the cryptocurrency market, don’t bet on a speedy recover in Bitcoin. Sure, we can see a possible stabilization in price relatively soon, and possibly even some modest gains. However, if you think you will see Bitcoin $10K by year end, or even sometime early to mid-next year, you may be mistaken.
This debacle may be just what the SEC needed not to approve mainstream Bitcoin related investment products. Furthermore, most institutional investors are not likely to come onboard anytime soon either. Just when the space was looking more stable, instability struck, and the shock of this recent pandemonium is likely to echo throughout the financial world for some time. Therefore, Bitcoin’s path higher will likely be a longer and steeper climb from here than many bulls (including myself) had envisioned.
The Bottom Line: What History Teaches Us Nevertheless, Bitcoin’s brief history teaches us that Bitcoin is extremely resilient. Moreover, the current decline, while steep in nature, at 78%, represents the size of a typical Bitcoin bear market decline from peak to trough. In fact, in prior bear markets, Bitcoin has gone through 75-80% corrections. This would put a lower-end price target for Bitcoin at $3,900, as it represents an 80% decline from the peak.
Another factor is that sentiment may be at its worst right now, which is typically the best time to go long Bitcoin, as the cryptocurrency continuously rises from the ashes and goes on to make substantially higher new all-time highs.
So, why should this time be any different? I don’t think it will be. With a market cap of only $80 billion, Bitcoin’s total value is little more than an average company in the S&P 500. However, the digital asset represents a potential alternative currency and payment system to the current fiat monetary system.
Many may argue this point due to transactional scalability, speed, and other issues. However, Bitcoin stands for something, it is a functional idea, one that takes control over currency out of the hands of the central banks and the central planners and returns it to the regular, everyday citizens of this world, erasing all country borders, and bureaucratic red tapes in the process.
Bitcoin represent a new system, powered by a new and better form of technology, and this transitional process is still in its very early innings.
The technology surrounding Bitcoin and other major digital currencies will continue to improve, and with time, demand for Bitcoin is extremely likely to increase. Therefore, despite the recent declines, longer-term Bitcoin’s price is still likely to go substantially higher.
Risks Do Exist Detrimental Government Regulation
In my view, the number one long-term threat Bitcoin faces is detrimental government regulation or an all-out Bitcoin ban. If major Bitcoin-friendly governments like the U.S.
, E.U., Japan, South Korea, and others follow the footsteps of China and essentially make Bitcoin use and trading illegal, it could have catastrophic consequences for Bitcoin’s price. Demand would likely plummet, and when demand for a commodity decreases, so does its price, drastically at times. This seems unlikely due to the progressive steps taken in the U.S., E.U.
and other areas concerning Bitcoin, but the threat does exist, especially if Bitcoin ever starts to seriously challenge the current fiat financial status quo.
Continued Functionality Issues
Another risk factor is the concern that Bitcoin may never become a widely used transactional currency due to its issues with speed and scale. Yes, the Lightning Network promises to solve many of the issues associated with speed, cost, and scale, but there is no guarantee that the LN will become widely adopted, even over time.
Therefore, there is the risk that newer and more efficient digital currencies like LiteCoin, Bitcoin Cash and others will make Bitcoin somewhat obsolete as an actual medium of exchange for the masses.
Continued Security Breaches and Fraudulent Activity
Continued security breaches in the Bitcoin world concerning exchanges and individual wallets is a constant concern. If significant breaches continue, investors and users may start to lose confidence in the system and demand could decrease as a result.
Likewise, for fraud cases. In an industry that is relatively loosely regulated, substantial fraudulent activity is a persistent risk.
Just like with security breaches, when people get ripped off, it reflects poorly on the entire industry and demand along with prices can suffer.
One Million and One Cryptocurrencies
Another concern is the seemingly endless supply of new cryptocurrencies. There are now over 2,000 different cryptocurrencies listed on CoinMarketcap.com. The risk is that the market may become oversaturated with digital assets which could lead to a crash, or to a devaluation of many digital assets, including Bitcoin.
Loss of Interest Amongst the Masses
There is always the simple risk of loss of interest amongst the masses. There is a chance that Bitcoin will forever remain a niche phenomenon, a novelty, as JPMorgan’s Jamie Dimon puts it. In this case, Bitcoin may not experience substantial demand, and the price would very likely cascade much lower over time.
Bitcoin is Not for Everyone
The bottom line is that Bitcoin is not for everyone. I view it as an investment for people with a relatively high risk tolerance, and even then, maybe only 5-10% of a portfolio’s holdings should be allocated to digital assets.
Bitcoin is still a relatively new phenomenon, and no one truly knows exactly how it is going to play out over the long term. The truth is that 10 years from now, one Bitcoin could be worth $1 million, or it could be worthless, and given the number of uncertainties, neither outcome should really shock people.
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Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with substantial risk to loss of principal. Please conduct your own research, consult a professional, and consider your investment decisions very carefully before putting any capital at risk.
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