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Bitcoin (CRYPTO: BTC) is going through a tough time as it has plunged nearly 50% since its previous high in April 2021. The flagship cryptocurrency lost $ 1 trillion in market cap last month, and this spiral descending has a mixture of factors at play. In May, Elon Musk’s tweet about Tesla not accepting Bitcoin wiped 10% of its value. Later that month, China’s cryptocurrency crackdown pushed Bitcoin below $ 30,000. And the IRS calling for rigorous reporting on big crypto transfers added to the woes.
So, has the tide definitely turned against Bitcoin? It can be hectic for new investors, but if you’ve retraced Bitcoin’s journey, that’s nothing new. According to analysts, investors who held Bitcoin for one to six months boosted the sale. Nonetheless, institutional investors, large companies and analysts are still fairly confident in the price rebound of Bitcoin.
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Here are three main reasons why Bitcoin’s current crash is nothing to worry about.
Institutional investors continue to source Bitcoin
Institutional investors include large public and private companies as well as fund companies that invest in Bitcoin-related products.
Square, led by Jack Dorsey, invested an additional $ 170 million in Bitcoin in February 2021. In the same month, Microstrategy spent more than $ 1 billion in high yield debt to acquire additional bitcoins. In March 2021, Morgan Stanley became the first major U.S. bank to offer access to Bitcoin funds to its high net worth clients.
Institutional investors aren’t just addicted to Bitcoin for price appreciation. They see money as a credible store of value and a hedge against economic instability. The continued influx of large corporations alone can push Bitcoin into the mainstream. Bloomberg claims that the rapid adoption of bitcoin indicates a phase of bullish growth. The media giant also predicted that the price of bitcoin would reach $ 400,000 by the end of the fourth quarter of 2021.
Bitcoin sees increased acceptance from countries
Besides institutional investors, many governments are also seeing cryptocurrencies in a new light. El Salvador recently declared Bitcoin as legal tender alongside the US dollar. There is widespread speculation that India might recognize Bitcoin as an asset class as well. Additionally, the US, UK, Finland, Canada, and Germany already have a positive position on Bitcoin. These initiatives could perpetually alter and generalize the way investors and regulators view Bitcoin or other cryptocurrencies.
Bitcoin saw a bull run after halving events
50% of Bitcoins were mined in January 2009, but the remaining 50% will be mined in over 120 years. It is because of a unique event called ‘halving’ that Bitcoin undergoes every four years. Miners’ reward is halved every four years or after mining every 210,000 blocks. So the supply of Bitcoin relative to the demand decreases and the price rises. Historically, Bitcoin has always spiraled upward after a half event. After the first halving in 2012, the price of Bitcoin increased 90 times.
The next event is scheduled for 2024, and we can expect the cryptocurrency to see a bull chasing after that. However, the market has now matured since 2012, and the impact might not be too pronounced this time around. In addition, price appreciation could take four to six months to materialize. Therefore, you can buy Bitcoin before the halving event, but only if you plan to hold it for the long term.
A word of warning
While the current scenario suggests otherwise, the game is not over for Bitcoin. It has intrinsic value, and a few tweets can’t shake it.
As for the regulatory landscape, I would say stronger laws indeed await cryptocurrencies. But better regulation will only boost credibility and make investors choose Bitcoin with more conviction.
Bitcoin price movements are a simple game of supply and demand. Unlike stocks, there are no fundamentals involved. So when investors are optimistic about the future of cryptocurrency, they buy more and the price goes up. On the contrary, when their belief in money starts to falter, they sell.
There is no doubt that Bitcoin has come under pressure and the recovery could take some time due to regulatory headwinds and global macro risk. However, further declines below this point, if any, will be transient.
Bitcoin is a very volatile asset and you can hold it as part of a diversified portfolio for the long term. However, do not be surprised to periodically see such dramatic price fluctuations, as this is very typical of cryptocurrencies. So, be sure to invest money only insofar as you are prepared to lose. Also, don’t try to time the markets because, with such a volatile asset, timing can bring a sharp shock.
This article represents the opinion of the writer, who may disagree with the official recommendation position of a premium Motley Fool consulting service. Were motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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