Volatility has returned in force to Bitcoin, leaving bulls suggesting that now could be an attractive time to buy, while bears warn that the cryptocurrency could continue to slide.
Cryptocurrencies such as Bitcoin dominated the financial headlines for much of 2017 but this came to an end when they were hit with some significant falls at the end of the year and handed back the bulk of their gains.
The cryptocurrency fell into the background for much of 2018 as the decline tailed-off and the market went relatively flat. However, this week has seen the brutal sell-off return and commentators are split on where investors should go from here.
Performance of Bitcoin over one week
Source: Coinbase, as of 20 Nov 2018
The chart above shows just how challenged the Bitcoin market has been over the past week. It started the week valued at $6,290.72 (which is some way off the $20,000 seen at its peak) but dropped to $4,292.91 halfway through today’s session – a fall of 30 per cent.
Nigel Green, founder and chief executive at deVere Group, is of the opinion that Bitcoin investors will use the dip in the cryptocurrency’s value as an opportunity to add to their holdings.
“Just a few weeks ago, crypto traders were airing concerns about the lack of volatility in the crypto market. Now volatility is back and many savvy investors will be using this as a major buying opportunity, perhaps the last one of 2018,” he said.
“Savvy investors understand that digital currencies are the future of money and, as such, they will be capitalising on the lower prices in order to build their portfolios and shore-up their positions.”
Green added that there appear to be three main drivers behind the renewed volatility in Bitcoin.
The first is the uncertainty surrounding the Bitcoin Cash ‘hard fork’. Last week a new version (or fork) of Bitcoin Cash was launched, which was itself a fork from the original Bitcoin blockchain. Investors have to choose which version they will support – Bitcoin ABC, which was previously called Bitcoin Cash, or the new Bitcoin SV fork – and this generates turbulence in the market.
Secondly, the US Securities and Exchange Commission has put the cryptocurrency market under scrutiny. While deVere Group’s Green has called for regulation of the crypto sector, this scrutiny has seen caused some volatility in the space.
Finally, cryptocurrencies tend to suffer from ‘herd mentality’. In other words, some have been selling Bitcoin because the rest of the market is also selling.
Performance of Bitcoin over 1yr
Source: Coinbase, as of 20 Nov 2018
“Crypto cynics are using this current wave of volatility to knock digital currencies. Whether it is Bitcoin, or any of the current generation of coins, or not, cryptocurrencies are here to stay,” Green concluded.
“Prices might fall further over the next few days, but we can expect a long-term upward trajectory for the crypto sector.”
However, those ‘crypto cynics’ are less confident that the cryptocurrency has a rosier future ahead of it. Indeed, some argue that Bitcoin investors could lose their entire investment.
Neil Wilson, chief market analyst at Markets.com, said that the “crypto bloodbath” continues and is unlikely to go away any time soon.
“Things looks like they only get worse from here. Where is the incentive to buy? It does rather look like the bottom is coming out of this market,” Wilson argued.
“Bitcoin has easily breached key psychological support at $5,000 and with it trading at $4,500 the move back to the Sep 2017 lows at or just below $3,000 looks eminently achievable. The spillover into other crypto assets matters. Bear target should be zero, as that is what they're worth.”
Jordan Hiscott, chief trader at ayondo markets, highlighted a new driver of cryptocurrency volatility that has not been seen before. Indeed, it represents a reversal of previous trends.
“For me, recently there has been a noticeable malaise in take up of Bitcoin along with other risk-traditional assets, like equities – US tech stocks in particular – and index futures. There are many catalysts for this, the most prominent being tensions between China and the US. The kind of trade activity I usually see on this is a switch from traditional risk assets into cryptocurrencies - usually with Bitcoin as the favourite,” he noted.
“This didn’t come to fruition this time and subsequently the trading range for Bitcoin of $6,000 to $6,600 was broken to the downside and the long-term support of $5,800 was also broken within a couple of hours with relative ease. The technical analysis side to the break of support level is key. The asset has been threatening to do this for four months now but was that the only reason for the fall?”
Due to ongoing uncertainty within cryptocurrencies, Hiscott said there is potential for “extreme volatility” within the asset class. He added that it would make sense for anyone with long positioning in either Bitcoin cash or other cryptocurrencies to reduce their risk until more is known.
Analysts over at FxPro added that last week’s sell-off seems to represent a “turning point” for the Bitcoin market. They noted that the decline in the cryptocurrency was not down to a single, sharp collapse but systematic sell-off.
“The only question now is how low the new correction will turn out. Experts predicted a decrease in Bitcoin to the area near $3,500, at which point the cryptocurrency will stabilise and receive some support from market participants,” FxPro’s analyst said.
“At the moment, we have the same ‘hype factor’ which pushed Bitcoin to $20,000 last year, but however in the opposite direction: from rapid growth to extreme fear and sell-off.”