Has Bitcoin Bottomed?

Has Bitcoin Bottomed?
Stéphane Renevier, CFA

over 2 years ago5 mins

  • There are a lot of factors driving bitcoin’s price – some negative in the short term but some more positive in the longer term.

  • In practical terms, it means the price might fall further. But bitcoin’s fundamentals are improving, so those price falls might prove interesting opportunities to buy.

  • If you do think bitcoin’s price will recover, a potential strategy is to buy a third now, a third if its price breaches $25K, and a third if it breaches $20K.

There are a lot of factors driving bitcoin’s price – some negative in the short term but some more positive in the longer term.

In practical terms, it means the price might fall further. But bitcoin’s fundamentals are improving, so those price falls might prove interesting opportunities to buy.

If you do think bitcoin’s price will recover, a potential strategy is to buy a third now, a third if its price breaches $25K, and a third if it breaches $20K.

The last few weeks have left bitcoin feeling worse for wear, sure, but it could only be a matter of time before the cryptocurrency turns its luck around. So let’s take a look at the factors that will be driving its price in the short and medium term, and see what they tell us about when it’ll bottom out – and what you can do if it hasn’t.

What could push bitcoin's price down in the short term?

The “great mining migration” is underway

China’s clampdown on bitcoin mining has initiated “the great mining migration”: miners are leaving the country in their droves to set up shop wherever energy is cheap and regulation welcoming – like Texas.

The long-term effect of this migration is likely to be positive, since it should force miners to shift towards greener sources of energy and help spread the risk of mining (which up to now has been concentrated in China). But in the short term, it’ll push bitcoin’s price down: miners will need to spend a lot to transport their equipment, buy new machinery, pay legal costs, and so on. And to do that, they’ll probably need to sell their bitcoin.

The Grayscale Bitcoin Trust’s lockup is ending

The Grayscale Bitcoin Trust (GBTC) is the world’s biggest holder of bitcoin, and a significant amount of its shares will be released from lockup in July. In other words, investors who weren’t able to sell their shares for six months after it listed will finally be able to do just that.

What’s more, the fund’s shares are currently trading at a discount to the price of bitcoin, which means arbitrageurs – who are likely to buy the trust and sell bitcoin as a hedge – could put even more pressure on the downside.

Governments are cracking down

Governments can’t crack down on the bitcoin network itself, but they can on exchanges, miners, and citizens.

That’s hard to achieve in practice: Nigeria, Iran, and India have proved as much. But China has had some success in the area. And while increased intervention might lead to more mistrust towards the government and, in turn, boost demand for bitcoin, negative headlines could force its price lower in the meantime.

What could bring bitcoin’s price back up in the short term?

Leveraged trading is on the out

Traders can use high leverage to speculate on the price of bitcoin, which means they only need to put up a small amount of capital to control a large amount of bitcoin. The downside is that they need to add capital to hold their positions when its price falls, only for their positions to be liquidated if they can’t. That adds to selling pressures, pushes its price even lower, and leads to even more liquidations.

But the wave of leveraged trading looks like it’s over: net unrealized profit and loss numbers suggest speculative retail investors who bought near the top have abandoned their positions, leaving long-term HODLers to take back control and provide more stability.

Short-term traders are capitulating. Source: Glassnode
Short-term traders are capitulating. Source: Glassnode

What could bring bitcoin’s price back up in the longer term?

Data shows there’s an end to the selling in sight

Given how difficult it is to estimate the crypto’s fair value, investor sentiment and behaviors play an essential role in determining bitcoin’s price.

So to assess that sentiment, investors can look at the transaction data tracked on the blockchain (a.k.a. “on-chain data”): everything from inflows to outflows, holding patterns to cost bases. And according to analysis from ARK Invest, those indicators are showing that while bitcoin’s price might still go lower, sentiment between buyers and sellers is now more balanced, meaning its price should start to level out.

Bitcoin is going green(...er)

Bitcoin has lost fans as investors and institutions alike eye up the cryptocurrency’s environmental impact, but miners are shifting towards greener sources of energy.

Bitcoin mining – as Square explained in a thought-provoking white paper – not only incentivizes renewable energy, but it could also use energy that would otherwise be wasted. That makes it an ideal complement to generation and storage solutions. The great migration will only accelerate that trend: miners are moving from coal-dependent China to places with much more green energy potential – and places that have to be a lot more transparent about their energy consumption.

Institutions will come back to bitcoin sooner or later

Institutional adoption has fallen recently – partly due to the aforementioned environmental, social, and governance concerns, partly the high volatility, and partly the cryptocurrency’s significant fall in price. But plenty of institutions have already committed to offering bitcoin products and supporting its ecosystem. And now that its price is dropping off, they might see this as the ideal entry point – so expect them to start buying up the cryptocurrency again sooner or later.

So has bitcoin bottomed?

With so many factors pushing bitcoin’s price down in the short term, it may be premature to call the bottom for bitcoin’s price. But what’s going on in the longer term is positive – and even the cryptocurrency’s falling price could create some interesting buying opportunities.

One way to have your cake and eat it too is to divide the total amount you’re willing to invest into three parts and buy more as bitcoin price falls further. For example, you could buy a third right now, a third if its price drops below $25K, and a third if it drops below $20K. It’s unlikely you’ll ever call the exact bottom, so diversifying your entry will make it more likely you’ll stick to your investment. And the lower bitcoin’s price goes, the lower your average entry price – and the higher your profits.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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