So far this year, bitcoin prices have been buoyant, up 124% for the year to date.
But since 14 April, the world’s number 1 crypto has lost more than 23% – from almost $65,000 per coin to $49,647 (current price at the time of writing this article).
After Bitcoin prices breached a new all-time peak following the exuberance for digital assets after Coinbase Global’s listing on the Nasdaq last week, we saw a huge drop, and still don’t see prospects for a swift recovery.
Does this mean investors should be prepared for a new downtrend and price movement to $40,000, as a lot of experts seem to expect? Not so fast. Let’s analyze the situation.
Why did Bitcoin fall by so much and so quickly? There are 5 key factors likely to have caused the price of crypto assets to drop steeply:
- Regulatory pressure is increasing.
- Mass liquidation.
- An overheated futures market.
- Whales selling.
- Concerns over US President Joe Biden’s tax plans.
The latest news from the cryptocurrency area is mostly pessimistic – to be honest, we haven’t seen any positive news since Coinbase listed on the Nasdaq. Some also blamed COIN’s lacklustre performance.
Regulatory pressure on the crypto market is growing in the United States, Turkey and South Korea.
The cryptocurrency market has been sensitive to attempts at regulation. Even if this area doesn’t depend on any central bank directly, human psychology is still the same – when newspapers all over the world are screaming “cryptocurrency is banned” or “taxes will increase”, people start to close their positions in hope of avoiding the potentially approaching danger.
The inflation of fiat currencies and low-interest rates on saving accounts at traditional banks, (especially in the emerging markets) increased the numbers of people who are opting to use cryptocurrencies in an attempt to protect their savings from a sharp decline in the value of the local currencies.
As you know, the key difference between Bitcoin and fiat currencies today is on the supply side. The supply of Bitcoin is fixed, while for many fiat currencies, the central banks control the supply and have been increasing it in recent years via their QE programs. A high supply of fiat currencies combined with low interest rates сould theoretically drive hyper-inflation.
That’s why more and more people are looking to cryptocurrencies as a hedge against inflation, instead of bank deposits. There has even been a trend of BTC being favored over gold! 24% of the reduction in the gold price is attributed to Bitcoin. Bitcoin is having an impact. But nobody likes to lose customers and see them go to the competition, and central banks and governments aren’t an exception.
The Turkish case is particularly interesting. The Turkish lira is facing an inflation spiral (the course of USD/TRY price has risen almost 13% for the year to date). Increasing numbers of Turkish people are opting to use cryptocurrencies in an attempt to protect their savings from a sharp decline in the value of their local currency, the lira.
But the Turkish cryptocurrency market is unregulated. Last week, Turkey said it would ban the use of cryptocurrencies to pay for goods and services from 30 April. One of the reasons cited by the central bank was that wallets can be stolen or used unlawfully without authorisation from the holders.
A few days later the cryptocurrency exchange Thodex in Turkey went dark and almost 400,000 users lost access to funds and assets on the site. An estimated $10bln in assets are supposedly tied up in the exchange. Turkish media reports say that Faruk Fatih Ozer, Thodex’s founder, has flown to Albania, taking $2 billion of investors’ funds with him.
Does it mean that the entire crypto area is illegal and criminal? Of course not!
Initially, Bitcoin and other cryptocurrencies were used for illicit purposes (e.g., trafficking, tax evasion, money laundering). However, now it is different as Bitcoin transactions have become a lot harder to hide. In 2019, just over 2% of the activity in the cryptocurrency space was linked to illicit activity; and in 2020 it was down to only 0.3%.
Bitcoin has become a large market and is, therefore, more carefully scrutinized. Law enforcement agencies are using the blockchain to track down suspected criminals and the flows of digital money.
What about the prospects of BTC?
Charts on the short-term frame are showing some signs of being oversold, but the current short-term downtrend is still the main focus.
BTC/USD chart. Source: TradingView
The first target in a potential downside movement is $44,549 – a strong support level.
According to technical analysis, as long as the price of BTC is under $ 51,000, we are in a short-term downtrend that started on 14, April 2021. And the ability of buyers to climb to the level of $51,000 again is significantly important. If the price rises above $51,500, it will be a new signal for a bull market.
NVT BTC Ratio shows potential for the price to fall, but we are approaching the support area.
Bitcoin NVT Ratio
Source: Woobul charts
And as we can see on the chart below, the exchange’s reserves are decreasing so that means accounts are still buying (net demand).
The long-term outlook appears positive for the crypto area. The pre-programmed, finite supply of all bitcoins determines the value of each BTC, that’s why it’s a good candidate for diversification and inflation protection from a long-term perspective.
All investment strategies and investments involve the risk of loss. Nothing contained in this article should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as a recommendation or as a guarantee of any specific outcome or profit.
