Bitcoin (BTC) has recently undergone a significant correction downwards after seeing all-time highs of US $126,000 USD (£93,500) in September. It fell by approximately a third of its high to around $82,000, but has since rallied and, at the time of writing (Nov 28), is ranging around the $91-92,000 mark.
It’s tricky for even the most seasoned and qualified of analysts to make a prediction about any crypto asset, especially in the short term.
To compound this risk, the “crypto community” is so utterly polarised when it comes to support for their particular coin. These partisan voices make for a very often febrile online atmosphere. All that makes researching why a digital asset spikes or falls more difficult. Everyone has a heavy bias in favour or against.
There are, however, generic reasons why any financial asset may move. Digital assets may be a fledgling asset class, but their price is influenced by the same stimuli, including human sentiment.
Depreciating factors that lead to BTC dips
There are some reasonable explanations behind the recent drop in price.
Profit-taking is always a driver. When any asset reaches all-time highs or close to them, there will be a good percentage of liquidation where investors decide to sell their asset. BTC has been especially vulnerable to this due to its huge moves where investors have literally become millionaires over night. Profit-taking in those circumstances is inevitable.
Over-leveraged positions, where money is borrowed to buy an asset, very quickly get liquidated when the price starts to tumble. Crypto investing is a very risky business. Even as most of the western world is talking about digitising the currency ledgers and formally bringing digital assets into institutional investor vehicles such as ETFs (exchange-tracked funds) and pensions etc, they all still treat crypto as a risky asset.
Accounts set up with stop losses. A stop-loss triggers when an asset reaches a certain lower price. The mechanism is designed to mitigate exposure to a falling price. Unfortunately, market-makers can see where stop-losses are set and can quite easily (and legally) set of a chain reaction where the price of an asset is manipulated to hit a cluster of stop-losses. This begins a cascade effect.
Always be diligent and DYOR
As always, I take great pains to make clear that I am in no way offering financial advice. I have assets, which I believe will provide excellent returns over the course of the next few years, and have not done too badly thus far. But it has taken years of listening to various investors and experts, and reading white papers and reports trying to filter the noise and bias to find reasoned, logical information.
As with any data one is trying to decrypt, the truth does lie somewhere in the middle ground, not on the periphery, and if you are prepared to research digital assets and invest in them, then you’ll know the value of what they offer to the market.
Ultimately, we are not talking tangibles: a crypto currency cannot be held in the hand and gawped at like an ounce of gold. They have digital utility and are protocols for information to flow over. Their value is in utility. DYOR (do your own research.
NOTE: This article is the personal view of this columnist and should in no circumstances be viewed as independent investment advice.
