Does Bitcoin Still Have Potential?

ekeomachimdi (37)in #bitcoin • 9 years ago (edited)

Bitcoin crashes 30% from all-time high. Should investors stay away?
What we can learn from previous declines.
Why the future still looks bright for bitcoin.

For Bitcoin (and most other coin/token) investors, the previous 24 hours delivered another painful correction (of 30%) in the history of the digital currency, as illustrated by the chart above. Plenty of critics have used this opportunity to cite the perils of bitcoin, but is this time any different? Can we expect a rebound, or has bitcoin actually entered a bear market?

To aid our decision, let’s take a look at previous declines in 2017:

1/5/2017–1/12/2017

During this period, bitcoin’s market cap fell 30%, declining from the ranges of $18 billion to $12 billion in total value.

The cause was China’s Central Bank’s investigation of Chinese exchanges, which led many investors to panic-sell, fearing their digital currency would be lost on Chinese exchanges.

As investigations concluded, people regained their confidence in Chinese exchanges that satisfied investigators’ criteria, and bitcoin’s market cap eventually recovered 50 days later.

3/16/2017–3/19/2017

In March, bitcoin experienced its second correction of 22%.

This time, investors pulled out of the digital currency due to fear that a “hard-fork” would render their bitcoin worthless.

Despite the commotion, the hard-fork fears were dispelled after Bitcoin Cash (BCH) was spun off to run independently of bitcoin. Consequently, demand increased for bitcoin again, and its market cap recovered in 40 days.

11/6/2017–11/13/2017

A month ago, Bitcoin dropped around 20% in one week. I didn’t find anything new that stuck out, but one obvious reason is that early holders decided to take profits after reaching new highs. This time, it only took 12 days for the market cap to recover.

12/7/2017–12/10/2017

Just two weeks ago, the bitcoin community experienced another correction, with market cap declining 15%. Other than CBOE launching the futures exchange (for which I could not find a correlation to BTC’s price), no other news stuck out. This time, the market cap quickly recovered in 9 days right before the most recent crash.

As for this crash, the most notable event that may be a cause is Coinbase’s unannounced addition of Bitcoin Cash (BCH) to their GDAX exchange and the elimination of the “like-kind” transaction tax loophole. The digital currency community was furious with Coinbase for the unexpected addition of BCH, and many accused the company of insider trading with the pledge of abandoning the exchange for competitors. As for tax treatment, transactions between one digital currency to another will now be subject to taxation in 2018. This might have prompted large holders to convert back into dollars before 2018 since they no longer have the tax incentive to transact between virtual coins, and would pay taxes for those transactions in dollars anyways.

Why the Future is Still Bright

Now that we have taken a look at 2017's declines, here are some reasons for why bitcoin will recover and continue to reach new highs:

Major exchanges, like Coinbase, are making their apps simpler to use. Thanks to the media, bitcoin awareness has nearly reached ubiquity. Everyone seems to be talking about it, but comparatively few actually invest in it. The main reason is that bitcoin is complex and confusing. Digital currency was not too long ago a niche, geeky concept that only a small corner of the internet engaged in. Since its meteoric rise, there are lots of people who would like to invest, but just lack the knowledge of how to get started. If Coinbase can simplify its app to the point that a baby-boomer can confidently invest in digital currencies, then expecting billions of dollars to flow into the market over the next few years is not unreasonable.

Another source of capital is hedge funds. In an interview with Coinbase CEO Brian Armstrong, the CEO mentions that hedge funds are awaiting approval to gain exposure to digital currency via custodial accounts with the exchange company. Armstrong claimed that at least $10 billion would enter the market once hedge funds received approval. This would be a quick jolt in value for bitcoin, especially if many more billions pour in from hedge funds that are desperate to find high volatility investment opportunities.

Lastly, consolidation of bitcoin in few addresses has left us subject to wild price fluctuations.