With Bitcoin and Ethereum both down over 25% from their all-time highs and FUD taking over the market, many investors are concerned that the market has already reached its peak, and is beginning to enter bearish territory. Though this is a valid concern, history tells us that cryptocurrencies may have some more room to grow, and the new wave of institutional investment may stop history from repeating itself.
Ever since Elon Musk tweeted that Tesla would no longer be accepting Bitcoin as a payment method due to environmental concerns, the market has been in a freefall. Bitcoin has gone from a high of over $60,000 to struggling to stay above $40,000, and Ethereum has gone from $4,400 to $3,400 in less than a week. As always, the majority of other cryptocurrencies are also following the two market leaders, and causing losses across the market. This is concerning to some investors, who see this price action as the beginning of the end for the bear market, similar to how 2017’s massive gains were followed by -20% days in early January, and the fear in the market is at a one-year high.
For as long as Bitcoin has been around, it has seemed to follow a pattern of four years in bear market, then a massive bull market, usually following the Bitcoin halving. This was true in 2017, where the halving caused Bitcoin to increase nearly 20x to $20,000, then the bear market began and lasted until early 2021. Typically, these bull markets last for about a year or so until the market begins to begin its rapid descent. However, this current bull market has been going on for about six months. In theory, this should mean that there is another five or six months before investors should worry about a bear market, however this may not be the case.
Additionally, it appears that a lot of the recent cryptocurrency demand is coming from retail investors trading on Robinhood. This is evident due to the massive increase in Dogecoin price, which was caused solely by retail investors and tweets from Elon Musk. Unlike institutional investors, retail investors are much more easily spooked by dips in prices, and a small decrease in Bitcoin or Dogecoin could cause a chain reaction whereby more and more retail traders sell their Bitcoin in order to cut their losses. Even though the retail investors are crucial in getting the price up to new highs, they also are also to blame for rapid decreases in price.
On the other hand, with the inflow of institutional investment from the likes of Square, MicroStrategy, Tesla, and others, there seems to be a lot more Wall Street interest than previously. Furthermore, Bitcoin has hit new highs in terms of popularity and recognition, and is closer than ever to being the world’s digital currency. This inflow of institutional investment may help to stabilize Bitcoin at higher prices, as companies like MicroStrategy buy tens of millions of dollars of Bitcoin whenever the price dips, and helps to legitimize the currency as worthy of its valuation. Unlike retail investors, companies and institutions tend to have a much longer outlook and one less fueled by short-term price fluctuations. The stability that these companies provide for Bitcoin could be crucial in the long-term propagation of this bull market.
The technology of popular cryptocurrencies has also improved since the 2017 bull run, meaning there is more concrete reasoning behind the high valuations. In fact, Vitalik Buterin, the creator of Ethereum, has been quoted saying that the 2017 price hike seemed to be fueled by speculation, and now there is a lot more fundamentally that makes Ethereum and other cryptocurrencies potentially deserve their market capitalizations, such as DeFi. Now that top cryptocurrencies are revealing working products, their valuation is less rooted in speculation, thus making the inevitable price fall have a chance of being less drastic. For example, Cardano reached $1 in the past bull run without even having a working blockchain, but now has reached over $2 with smart contracts slated to launch in the coming months.
One of the most popular sayings for investors is that “history doesn’t repeat itself” and this could be true in this market in two different ways. One way would be that the market does not give us a year of bullish sentiment before decreasing, and that $60,000 was the top. The other possibility is that we are entering uncharted territory and that the bull market will last a lot longer than normal. Regardless, the long-term outlook for Bitcoin and other cryptocurrencies remains positive, and the price has zero effect on the technology or use-case. It is important to remember that the price drops won’t stop world governments from looking into utilizing cryptocurrencies in their monetary policy, nor will it stop Visa from using Ethereum for payments. Though the short-term price is something that is easy to get caught up in, it is by no means the driving force for the blockchain technology that promises to one day revolutionize the financial industry.
By Lincoln Murr