Potentially Large Losses Ahead Before Significant Bitcoin Recovery?

large losses possible before bitcoin recoveryBefore screaming “FUD”, let’s all try and be glass-half-full people and read the second half of the headline – “significant bitcoin recovery.” While an eventual upturn is imminent, short-term expectations should be managed accordingly (i.e. HODL!).

Forget about ETF’s, regulation and institutional adoption – the biggest thing affecting market prices during a downturn is emotion. Massively hyped-up media coverage of the upcoming bitcoin ETF’s have created a frenzy, and their imminent rejection could result in unnecessarily strong disappointment amongst new investors.

In reality, while a bitcoin ETF could bring huge additional liquidity to the market, it’s not something that should be seen as a do-or-die factor in the future of cryptocurrency. Bitcoin has thrived quite happily without an ETF for almost a decade so there is no reason why a rejection or delay should be cause for concern.

That being said, the coming months are going to undoubtedly bring some hard times. The recent spike above $8,000 gave the community some much-needed positivity after months of increasing lows, but it was never going to be the breakout we all wanted. There are far too many factors that are currently out of balance for a significant bitcoin recovery to gain traction at this point.

Factors delaying a bitcoin recovery

Bitcoin’s rather high current market capitalization doesn’t correlate with the low level of activity it’s seeing on the network. In the short-term, this imbalance will need to first level out for a decent rally to take off. Trading volumes are still far lower than during the build-up to last winter’s groundbreaking recovery that saw BTC hit USD 20,000.

Some of you will remember a poll from a few months back that suggested less than a percentage point of investors are considering bitcoin in the near future. I would imagine that percentage has increased slightly with recent institutional interest from big companies like BlackRock, but it still indicates a very different emotional outlook to BTC since this time last year.

Retailers have also reported a drop in bitcoin revenue, with less than half the number of their sales being transacted through cryptocurrency than previously. Google trends show a pattern in searches for the term ‘bitcoin’ that seem to fluctuate with emotion-grabbing headlines, further indicating Schadenfreude-like interest rather than searches for investment opportunities.

Mining has also experienced a vast alteration to its landscape this year, with industrial-scale mining operations and advanced hardware pushing down profits for individual miners without access to cheaper electricity. Crypto’s decreased value combined with a hash rate that has tripled this year could all contribute to a continued bearish sentiment.

So what’s the good news?

If bitcoin really is the ‘digital gold’ it’s touted to be then a brief look at gold price charts over the past 50 years should give even the most unfamiliar investor confidence. After the CME futures contract introduction that crashed gold by almost 50 percent in 1975, it regained over 400 percent in the coming five years. Admittedly it corrected soon after, eventually falling as low as USD 400 but has since leveled out to current USD 1,200 levels – significantly higher than the price it was at in 1975.

Considering the exponentially increasing speed at which markets move these days, it seems likely that we will see similar significant bitcoin recovery from its December 2017 futures contract introduction in a far shorter time span. Changpeng Zhao, CEO of the arguably the world’s largest cryptocurrency exchange, Binance, recently noted on Twitter that the current price drop correlates with historical movements.

“Many people seems to think BTC price was flat before this year, as they appear to be on the graph. To the old-timers, it’s the same pattern every year. Just the units on the left is [sic] different.”, he said.

As he points out, this is certainly not the first time bitcoin has suffered a long correction before enjoying exponential growth and there is no reason to suggest it won’t happen again. Global interest in blockchain technology is prevalent in almost every nation on Earth these days, and while bitcoin itself may not have the complexity required to become the world’s eventual digital currency of choice, it still has a long way to go before dying out.

Similarly, while approval of a bitcoin ETF will almost certainly not come this year, it will happen eventually. Regulators are not adverse to the idea of an ETF, they are simply taking into account all possibilities – a level of caution that is good for both the traditional and emerging markets. If gold is anything to go by, an ETF should double the price of bitcoin in the medium to long term once it gets approved next year. As with the futures contract, it too will likely see a huge spike followed by a resulting correction.

Keep a level head

As we move towards year end, memories of last years stratospheric rise may bring unrealistic expectations to many new investors. It’s very important at these times to manage expectations correctly – while a positive outlook is important, it alone will not drive prices. Rather than increasing adoption, unfulfilled promises could deter further investment. While another USD 20,000 spike before Christmas would be warmly welcomed, it may be more pertinent to prepare for a long winter hibernation before spring blossoms.

Mark Hartley is an IT specialist, freelance writer, keen traveler, and blockchain enthusiast. He has worked on the trading floors of the world’s biggest interdealer broker in London and helped integrate crypto-services into IT trading systems. When he’s not searching for the world’s most beautiful beach, he’s nose deep in any crypto and blockchain related news.