almost 2 years ago • 2 mins
After falling another 20% in May, bitcoin is now down 55% from its November peak – the fifth drop of this magnitude in the OG cryptocurrency’s history. But if you’re scrambling to benefit from the dip, don’t panic: bitcoin can spend an awfully long time licking its wounds.
See, bitcoin tends to have these slow, “saucer-shaped” recoveries that look very different from the rapid “V-shaped” bouncebacks you see in traditional markets. Just look at the chart above: it shows what you’d have made in percentage terms in the 180 days after those other drawdowns, and the mean across all five of them (purple line). On average, you’d have been sitting for a long time with paltry returns, if not losses.
It’s not completely clear why bitcoin languishes for so long, but there is one popular theory. The bitcoin market is a lot smaller than traditional markets, which means its biggest buyers – “whales” – have much more of an influence over its price. They exert that influence in a variety of ways, but in this case, to keep its price low after the dip. It’s in their interests to do just that: if they were to, say, immediately place an order for 10,000 bitcoin on a crypto exchange, they’d have to wait until there were enough sellers to fulfill their demand. And when there eventually were, the price they’d have to pay might be a lot less favorable than the one they originally wanted. But if they can keep the price low, stock up gradually, and wait for enough sellers to emerge, they can buy in wholesale further down the line. That would drive the bitcoin price up and take their new stockpile with it.
If you’re investing in bitcoin, there are two takeaways here. First, get your risk management right: size your bitcoin positions so you can handle deep losses and long recovery times. Second, treat it as an opportunity to do a version of what the whales are doing: use strategies like dollar-cost averaging (buying a set amount at set intervals) or value averaging to build yourself a bigger position in the crypto when the price is low.
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.