Bitcoin like other cryptocurrencies is known for high volatility. With the recent drop in price of the coin, it has become obvious to many market watchers that it won’t be an easy sail for the digital currency that is widely known as leading a financial revolution.
In the past 72 hours for instance, BTC has lost more than 30 percent of its value and the worst isn’t over yet. For a cryptocurrency that has increasingly gained attention mainly due to increasing awareness and adoption, 2020 was primed as a year that Bitcoin would gain traction resulting in another bull market similar to that of 2017, when it reached an all-time-high of nearly $20,000.
A Replacement for Fiat
It would have been easy to assume that a little known digital currency that rose from obscurity to being widely adopted as a means of exchange and store of value would morph to replace fiat as many analysts predicted, but that is not happening any time soon. What we have seen is an asset that can barely be relied upon in times of crisis as exemplified by the recent coronavirus instigated market downturn.
It is interesting that just a couple of weeks ago, the coin community was upbeat based on the performance of the market that there were projections that we would see prices that would dwarf every past experience.
Jack Dorsey, the Twitter CEO for instance said that the internet would morph to a nation-state with a cryptocurrency such as Bitcoin as its currency. But what we have seen so far is a deviation as most users have adopted the cryptocurrency as an asset rather than a means of exchange.
A Massive Price Drop
There are indications that the perception of users is a contributory factor in the high volatility of Bitcoin. Whenever there is a massive drop in the value of a digital currency, frantic investors have the tendency to sell off part of or most of their holdings leading to a further drop in price.
The March 12 price crash to $3,600 readily comes to mind. This is the heaviest drop in the value of Bitcoin in the past seven years. The day’s losses have been linked to the selloff experienced in the US stock market. It was also reported that this was the consequence of the coronavirus pandemic. A technical analyst, Eric Thiels explained the situation:
“Today’s massive dump in both the crypto markets and the traditional markets was very interesting to say the least. While many would say it is solely due to the coronavirus, looking into it further and you will see this does not show the usual signs of a recession. This may be because of the war on oil that many people have not heard about due to the news of the virus.”
A Pandemic Challenge
Nevertheless, we have to understand that these are peculiar times for the markets, especially the coin market. The pandemic is arguably the first real emergency situation that Bitcoin has faced. And the tendency is that such situations elicit panic selling. The impact is that prices drop with the resultant effect of greater panic and more selloffs.
However, the situation isn’t as bleak as it seems because harsh market conditions usually splits investors into supporters and unbelievers who spread FUD. In the above scenario, there are many investors, especially whales who saw the massive price drop of March 12 as an opportunity to enter positions even as many others sold their assets.
Full Swing And A New cycle
Another lesson from the happenings of this week is that with the massive losses, Bitcoin has entered into another cycle. Analysts have long established that $3,000 is the benchmark support for Bitcoin. So the cryptocurrency can rightly be said to be in its accumulation stage at this point. According to Thiel,
It is a well-known fact that institutional investors and many whales look out for such low price windows to enter positions at low risk prices. Looks at the charts show that there is impressive volume buildup which is an indication that there are many investors supporting the coin at values greater than $3,600.
Not A Safe Haven
A 2019 Gallup poll shows that 49 percent of Americans believe that the US economy would enter a recession soon. This is higher than the previous year’s poll in which 40 percent had the same opinion. With the Iranian crisis and the trade war with China, many investors seek stable assets as safe haven.
Some analysts have compared Bitcoin with gold with gold alluding that it would become the asset of choice in times of financial crisis. But with the recent happenings, it is now obvious that the cryptocurrency does not fit that role. This is likely due to the fact that despite being designed as a decentralized currency, the increasing role of centralized exchanges make it vulnerable to fundamental factors such as trade conflicts and the coronavirus pandemic.
Despite this shortcoming, the benefits of the crypto revolution are not lost on its most committed adherents. In a forum post on a Bitcoin forum, a user wrote that it is still his preferred asset in times of financial crisis.
A Revolution Not A Replacement
Perhaps the point that is lost on many is that cryptocurrency being a revolution does not necessarily mean that it is a replacement for fiat. Neither is it impervious to financial crises. That was not the original intention of Satoshi Nakamoto, the Bitcoin inventor.
Rather, his vision was to create a coin that is trustless by eliminating third parties. So the fact that the vicissitudes of the market and economy adversely affects the coin should not be a surprise to anyone.