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Normal correction or bubble burst? Analysts assess Bitcoin’s future after the fall

 

After dropping 38% in the low to $ 30,681, Bitcoin eases losses and approaches $ 40,000 again; what to expect now?

 

Despite the negative scenario in the cryptocurrency market since last week, the fall in prices since the early hours of Wednesday (19) took many investors by surprise, heating up the discussion about the future of digital assets like Bitcoin again.

The worsening began after Reuters and other news agencies reported that the Chinese government would have banned financial institutions and payment companies from participating in any cryptocurrency-related transactions.

And although analysts point out that the information is not a novelty, but rather a strengthening of the Chinese government in relation to digital currencies, prices have started to fall, with Bitcoin reaching the $ 30,000 level, its lowest value since February.

As the website Alternative.me, a popular sentiment service in the market, points out, there is currently an “extreme fear” in relation to cryptocurrencies. By dialing 23, the figure is about a third less than seen a week ago, when the indicator pointed to an “ambition” among investors.

But in the face of these heavy losses in just a few hours, many investors – especially newbies – must be wondering what to expect now. Could we have more losses ahead of us, or is this a good time to buy Bitcoin downtown?

In participation on the InfoMoney Radar this Wednesday (19) (watch the video above), Safiri Félix, director of products and partnerships at Transfero, recommended that the investor do nothing at this moment: “My recommendation for beginners is: turn off the screen, do not operate today. Leave it to the professionals, wait for things to settle, and then you can take a relative position if you are going to sell or increase your exposure. Today is that day when it is best to do nothing ”.

According to him, who has been in the crypto market for a long time, despite the scare, knows that falls like today are not unprecedented and that, in most cases, the market has managed to react in a positive way.

Safiri recalls that Bitcoin has seen sharp declines before and, even then, continued on an upward trajectory, as shown in the graph below. On Wednesday, the currency dropped just over 38% to a low of $ 30,681. But by 7pm, it was already worth $ 39,241, reducing the drop to 8.16%.

 

Beibei Liu, CEO of NovaDAX, says corrections to Bitcoin’s value are expected, as the currency’s record high has brought numerous investors to the crypt market, which has affected Bitcoin’s liquidity.

“It is normal for currencies to undergo corrections after a bull market. Weeks ago, Bitcoin reached its all-time high, hitting $ 64,000. For investors with little experience, a 10% drop is already worrying and they can start selling ”, he highlights. Liu questions, however, if investors will not see this downward movement as something that makes them more comfortable to buy bitcoins at a lower price.

Another point that has been dropping prices is the discussion on energy consumption for bitcoin mining, amplified after the demonstrations by Tesla founder Elon Musk. Critics even questioned whether the enormous energy expended would not be the trigger to burst a supposed bitcoin bubble.

The University of Cambridge’s Center for Alternative Finance (CCAF) recently estimated that the total energy consumption of bitcoin is between 40 and 445 terawatt-hours (TWh) per year, close to electricity consumption across the UK, from just over 300 TWh per year.

But, for Felix, the statements about energy consumption are “skewed”. According to him, energy expenditure on bitcoins, estimated by the University of Cambridge, is below the consumption of tumble dryers in the United States in one year. “In addition, bitcoin mining consumes a fraction of the entire financial market infrastructure.”

 

New support

Safiri points out that now the market needs to find out what the new price support will be. He points out that there has already been a recovery in the house of 20% since the low of around US $ 30 thousand reached in the morning, but that it is not yet possible to understand what the new support will be.

For him, if Bitcoin does not end the day below $ 34,000, the trend, according to the graphical analysis, is that it will keep on an upward trajectory in the long run.

“We have a flow problem now. We had a forced adjustment in positions, mainly for institutional investors, which led them to divest themselves of their positions. On the other hand, we have a weakened buying point, so it is natural for the market to go through this stress, but, probably, over the next few days and weeks, the market should settle down and have a clearer view of the movement of medium and long term ”, evaluates the director of Transfero.

 

Bitcoin to US$100 thousand

To be able to initiate a resumption, the market first needs to assimilate the shock of today, and maintaining the current levels, analysts point out that it is still possible for Bitcoin to return to its historic highs.

João Marco Cunha, portfolio manager at Hashdex, does not risk making projections about the currency’s price, but believes in a long-term recovery. “It always ends up being extremely speculative for you to talk about whether it will fall further or not, or if the trend we saw in recent months will continue. What I like to always aim for is the long term, in the belief in technology, and that hasn’t changed anything, neither with this news nor with today’s downturn. This was maintained exactly as before ”.

Despite being considered an uncorrelated asset from the “traditional” market, Bitcoin is also impacted by investors’ moods. As in March last year, when there was a sharp drop in widespread panic over the outbreak of the pandemic, now other factors have also reduced risk appetite.

Recently, what has been seen is greater investor caution in the face of fears of rising inflation in the United States, which could lead to higher interest rates than expected.

Maya Vujinovic, a member of the annual roundtable promoted by Satoshi Nakamoto and a member of the CoinDesk Advisory Board, points out that the downward movement was not restricted to Bitcoin.

“The entire market is down. Many technology stocks and crypts have fallen because of a correction movement. It is not just China that explains the fall. There are many factors involved, but it may just be a natural movement of the cycle. We are in the low period of the cycle, after a period of euphoria that lasted for some time. And we are seeing a correction before a massive change in the market ”, says Maya.

Felix says that today the risk appetite is much lower than at the beginning of the year, when Bitcoin took a bullish trajectory. “In order for Bitcoin to resume its trajectory and seek new maxims, we will need a settlement of expectations and a flow of purchases, mainly from institutional investors. “, He says.

But Safiri pointed out on the InfoMoney Radar that, if the risks of global inflation do not materialize, the currency may seek new highs in a not too long horizon, reaching more than US $ 70 thousand. Considering one of the most used forms of technical analysis in the crypto market, known as stock-to-flow, the director of Transfero even says that it would be possible to see Bitcoin reaching $ 100,000 by the beginning of next year.

Leverage

Regarding the adjustment of investor positions, one of the factors pointed out by several experts for the sharp falls of this Wednesday was the derivatives market, with large amounts of open positions. With investors operating leveraged and with automatic sales orders (stop loss) – seeking to avoid very sharp losses – the beginning of a collapse creates a cascading effect that triggers these orders and further worsens the fall in prices.

Liu points out that the so-called DeFi (decentralized finance system) contributed to this situation with the guaranteed loans market.

She explains that today, for example, by investing US $ 10,000 in Ethereum, it is possible to borrow US $ 7,000 in stablecoin. But if the price of Ethereum collapses, the DeFi system will automatically sell the investor’s position in the currency to repay the borrowed stablecoin to the creditor.

According to Liu, in the DeFi system, the majority of the market has orders to trigger the stop-loss when assets fall by 30% to 40%. “This means that if the crypto price drop reaches 30% to 40%, all DeFi platforms will automatically sell more crypto, which can accelerate the drop to 50%, 70%, 80% or even 95% in minutes. This would undermine confidence in the crypto market and put pressure on regulators to start questioning whether unregulated financial products should be made available to the average investor, ”warns Liu.

 

Source: InfoMoney

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