Ever since the creation of bitcoin, the digital asset has become well known for its sporadic price changes. However, with the recent selloff, bitcoin traders and speculators are wondering “will bitcoin go back up?”
In this article, we will take a look at what had caused the price drop in the first place, why bitcoin always goes back up, and the best strategy to buy if it does go back up.
Why Bitcoin Dropped Below $60K
Like every other speculative asset, bitcoin experiences price changes from time to time. However, after hitting an all-time high above $60k, BTC saw one of its biggest price corrections since the beginning of the year.
The asset’s value had dropped by nearly 15%, triggering a whopping $10 billion liquidation across the entire crypto industry within 24 hours.
Several analysts, commentators, and journalists have pointed out several unconfirmed reasons behind the price drop, but it has not been confirmed as to what exactly led to that bitcoin price correction.
Now, while some of these stories had an atom of truth in them, others were blatantly fake news. Some of the attributed reasons for the price drop include:
- Bitcoin Hash Rate Drop: where an analyst suggested that the blackout in Xinjiang, China that resulted in a drop in the hash rate had subsequently affected bitcoin’s price. However, this theory was disputed by several other analysts within the crypto industry.
- Biden’s tax hike assumption.
- Fake news that had spread on Twitter about the US Treasury intending to charge financial institutions for laundering money using cryptocurrencies.
It is very important to note that bitcoin trading is not similar to trading equities. Stocks tend to trade more aggressively on specific earnings days. On the other hand, bitcoin can be traded aggressively at random times. Now, when this happens, commentators often look for probable cause to attribute to the price change, which gives rise to many unconfirmed and fake news.
Although some of the possible reasons given earlier had, to a lesser extent, contributed to the bitcoin price crash, the main culprit here is excessive leverage.
While it is true that the market can not function properly without the buyers and sellers (longs and shorts), the problem lies in the balance between these two parties.
In a situation where there is an imbalance between longs and shorts, with too many leveraged longs on bitcoin without accompanying alternate pressure, the current price may temporarily be unsustainable.
According to an interview that the popular bitcoin proponent, Anthony Pompliano, had with the young Bitcoin Magazine contributor, William Clemente III, these leveraged liquidations can be likened to a Jenga tower.
If the Jenga tower is built on an unstable base, it will only take a slight push for it to come crashing down. Clemente noted that excessive leverage creates a loop of negative effects that resulted in the crash. When the price falls, highly leveraged longs get liquidated, prompting prices to fall even lower.
As prices continue to fall, more sellers are forced to liquidate their positions in a weak attempt to reduce losses and before long, the market has lost billions.
It is this imbalance, which is propelled by excessive leverage, that causes volatility. And when volatility comes in, FUD causes weak traders to liquidate, allowing strong traders to create a more sustainable price level before the market can continue its bull run.
Will Bitcoin Go Back Up?
Bitcoin’s volatility is one of the major reasons why many people are reluctant to invest in it. However, its volatility has also played a key role in its success story.
Over the years, we have seen bitcoin’s price fall to unimaginable depths, dealing a huge blow to investors. But it has also managed to rise above those levels and get to where it is now.
Therefore, it is very possible bitcoin could go back up. It might be even more surprising if it surges to an extent that speculators did not even anticipate.
But what is the driving force behind the high price of this crypto asset?
Why is Bitcoin So High?
Since the beginning of this year, bitcoin has been smashing one all-time high (ATH) after another. It has managed to break several barriers on its way to the moon.
However, several factors have made it possible for the cryptocurrency to get to its current level. Let’s look at some of them.
- Increased Institutional Adoption
The bitcoin adoption trend is one of the major driving forces behind its high price. The digital asset is considered a safe-haven asset against the disastrous consequences of inflation.
Armed with this belief, several large institutional investors are entering the crypto space and converting their cash reserves into Bitcoin.
Leading this group of investors is the business intelligence and software company, MicroStrategy, which currently holds over 91,000 bitcoins worth billions of dollars. The company has also made bitcoin its primary reserve asset.
Elon Musk’s electric car company, Tesla, also has more than 2 billion worth of bitcoin in its possession. Despite just joining the bitcoin trend in February, the company is going bullish on the digital asset and other cryptocurrencies.
Therefore, with this number of large institutional investors joining the crypto bandwagon, adoption rates increase, thus, hiking the price of bitcoin.
- Bitcoin’s Scarcity
It is no longer news that bitcoin has a limited supply. It was designed to be a total of only 21 million bitcoins in existence and 88.8% of that quantity has already been mined.
New bitcoins enter circulation through a process known as Bitcoin mining. The miners do this work by verifying bitcoin blocks, which are added to the network and they earn a reward.
However, every four years, the block reward is reduced by half, a phenomenon called Bitcoin halving. This halving is a very important event within the crypto space.
It plays a very crucial role in bitcoin’s price movement. Once the halving takes place, there will be a lower supply of coins and higher demand. Additionally, as more people become aware of bitcoin’s supply cap, it drives their demand for it and that causes the asset’s price to skyrocket.
So, if bitcoin ever goes back up, what is the best strategy that investors can employ when buying?
Best Strategy to Buy If Bitcoin Will Go Back Up
Bitcoin is a highly speculative asset and as such, it is very difficult to determine its movement. But if it does go back up the best strategy to but is the DCA method.
Dollar-Cost Averaging (DCA)
This is a very popular trading strategy that has been proven to work, especially if it is done over a long period. This strategy involves buying small quantities of a digital asset at specific times over a long period.
With this method, rather than investing all your capital at the same time, you split them into several small amounts and choose a particular time and day of the week to invest.
Then, you systematically invest those small amounts of money until you have invested the entire investable capital.
This strategy helps to reduce the impact of market volatility, which is very common in any speculative market. In essence, you will gain more bitcoin by purchasing in bits than you would if you invested all your money at once.
Trading bitcoin comes with its risks as investors must be prepared for sporadic price changes, both favorable and unfavorable.
True, bitcoin is volatile, but its volatility is its beauty. The king of cryptocurrencies has managed to move from having no value to becoming one of the best performing assets within 11 years.
Therefore, it is no longer a question of “if” bitcoin will go back up but “when” it will happen. It might even be sooner than you think!