Why Many Investors Are Pleased About Bitcoin's Recent Price Crash

Toby Hazlewood

And why many are choosing to invest for the long-term

Bitcoin in a bubbleImage from Shutterstock

After making my first tentative Bitcoin investment in January 2021 I couldn’t shake feelings of regret that I hadn’t started sooner.

I felt lucky that I’d seen the light and taken action when the price was around $30,000 per Bitcoin — $3,000 or $300 would have been better but you can’t go back in time. I steadily bought a little at a time, watching with glee as the price rose to an all-time-high of over $63,000.

And then in May this year, it happened:

Source: Coindesk Podcast Host NLW on Twitter

In a series of extreme sell-offs over a few days in May the price of Bitcoin plummeted back to a low closing price of $34,000. Hardcore Bitcoiners, casual investors, speculators and opportunists the world over were left licking their wounds. Skeptics and cynics laughed loudly.

Ironically, at the height of my enthusiasm for Bitcoin I’d written a story calling for a radical drop in price  so I could buy more at a lower price.

And in May my wish came true.

What caused it?

We’ll probably never know which single thing was most to blame, but many have their own theories.

Elon Musk seems to have become the ‘face of the crash’. Many (myself included) have applauded him in the recent past for blazing a trail on behalf of Bitcoin. Many (again, myself include) are tiring of his meddling.

While I’ve applauded various of his moves, I’ve also called out that the disproportionate sway that he and various other celebrity influencers have over crypto is damaging and costs credibility. When a publicity-hungry billionaire treats Bitcoin like his personal play-thing it dilutes the power of messaging to the wider world about it as a serious investment asset or tool for finance.

Source: Elon Musk’s Twitter

Other things may have contributed to the price crash — some are down to Elon or were exacerbated by him (including the renewed hysteria over Bitcoin’s energy usage). Others were quite separate.

  • The Chinese Government threatening to shut down Bitcoin mining;
  • Over-leveraged retail investors having their positions liquidated when the price started to plummet;
  • The influence and distraction of Dogecoin and other Alt-Coins and Meme-coins
  • Renewed threats of government intervention and regulation;
  • Advancing discussions around Central Bank Digital Currencies.

Each of these likely played a part.

What it felt like to see the price tanking

I’d hoped for a dip in price so I could buy more at a better price, but as the price plummeted it reminded me of how uncomfortable it feels to watch. I recall at the start of the pandemic watching the value of my pension investment dropping by 10% within a number of days — the only solid investment that I’ve contributed to since I started work 20 years ago.

I felt powerless. Despondent. Confused.

But as Bitcoin crashed I recall feeling more laissez-faire — what will be will be.

At various points my holding of Bitcoin has shown a notional 40%+ gain. Right now I’m down by 15%. In the scheme of things the loss is trivial.

But how would I have felt comfortable had the price dipped below $20k again? How about $10k? $5k? The honest answer — I would likely feel more wounded for the loss in real-terms. But I’d feel even more inclined to try and accumulate a full Bitcoin at that price, since ‘why not?’.

It’s reaffirmed my comfort with the risk

I’d always started out with Bitcoin investing only what I could afford to lose and haven’t ever worried about the prospect of losing it all. Watching the value of my holding diminish by the minute was annoying (for want of a better word) but I never felt a desire to sell what was left in case it went to zero.

The over-leveraged buyers of Bitcoin who were liquidated in the crash likely felt differently.

As I understand it, on some exchanges traders can access 100x leverage either long or short if they believe the price is going to increase or decrease. They put up a percentage stake and the exchanges allow them the prospect of greater gains from price movements if they are correct.

Those who were leveraged-long and who bought when the price was rising, were likely counting their notional gains as the price increased further. But when it suddenly started dropping, the exchanges liquidated their positions at the point at which their deposited funds were insufficient, selling their Bitcoin and causing the price to drop even further.

I’ve heard estimates of around 750,000 such traders being liquidated during the crash, and others who took leveraged-long positions when they thought the bottom had been reached, only to see it drop further and liquidating them again.

I couldn’t live with such risk — either the prospect of missing out on greater gains from selling in a rising market or the prospect of notional gains being wiped out by a crash. Leveraged trading isn’t for me.

No — all things considered I’m happy with investing what I can afford to lose in the hope of it augmenting my other, more conventional investments.

Bitcoin being struck by lightningImage from Shutterstock

It exposed the power and motives of Elon and other influencers

At times, Bitcoin Twitter was alive with praise and enthusiasm for the actions of Elon, Snoop Dogg and others whose comments and actions appeared to favour the price of Bitcoin and crypto more widely. When Tesla bought $1.5 billion of Bitcoin it seemed to signal the beginning of corporate adoption and acceptance. When Tesla sold some Bitcoin it demonstrated its liquidity as a reserve asset. The price went up, and with it the enthusiasm.

Now we’ve seen that the same effects can happen in reverse. Tesla backtracking on accepting Bitcoin for new cars may be down to them seeking entry into the renewable fuel credit market and the perceived tension with that and the hysteria over Bitcoin’s energy usage. Or there may be some other reason.

Either way, we’ll be more mindful going forwards of the personal incentives, motives and agendas of high profile figures regarding Bitcoin, just as we would in relation to other aspects of finance. We’ll be more inclined to look behind the veneer of enthusiasm and hype.

It’s also reasonable to expect that the attentions of governments and regulators would be directed towards the actions of Musk and others in the aftermath of Bitcoin’s crash. If he were to make similar statements to influence the price of Tesla stock (or any other publicly traded asset for that matter) then regulators would investigate and such an action might be forthcoming in relation to his conduct with Bitcoin (and Dogecoin) in recent weeks.

The more storms it weathers, the more Bitcoin proves its longevity

Even in the limited time I’ve been involved with Bitcoin and blockchain, it’s apparent that it faces the same challenges and issues time and time again:

It’s poorly understood and viewed suspiciously by governments
Its energy consumption is disproportionate to the benefit offered
It enables criminality
It’s too volatile to be an investment asset
It doesn’t scale for transactional purposes like the conventional system of finance that it purports to replace

Bitcoin maximalists and enthusiasts try to dispel these myths with cold, hard data but it never persuades the doubters and cynics.

But as time goes on and the more times that Bitcoin recovers, endures and strengthens, the more it demonstrates that it is here to stay.

A recent article in Money Week reflected on the performance of Bitcoin this year, noting that at $40k it has gained 40% in 2021. That it’s actually been as high as $60k+ and lost 50% in the May crash is also significant, and speaks to the volatility that is synonymous with Bitcoin.

Even though the volatility remains a feature (at least for now), very few are willing to discount it or state definitively that this signals the end for Bitcoin altogether. The same Money Week story entertains the prospect of $100k Bitcoin as a feasible possibility — few can really say for sure.

In the meantime the more that institutions adopt Bitcoin, the more integrated it becomes with the rails of conventional finance and the more private investors start to explore it as a possible means of making some money, the more it seems likely that it’ll continue to increase in price. This will happen even if investors have to weather occasional gut-wrenching corrections and pull-backs from time-to-time. They’ve been experiencing this since it was created.

It’s brought forward the debates about Bitcoin’s ‘baggage’

Concerns about the impact of Bitcoin and cryptocurrency upon the environment aren’t simply going to go away. As much evidence as its fans can provide, it’s plainly apparent that those who are against it will keep repeating the same concerns.

It seems positive then that in the immediate aftermath of the price drop in May, that moves are afoot to tackle some of these sources of fear, uncertainty and doubt (a.k.a. FUD), once and for all.

A self-appointed ‘Bitcoin Mining Council’ has met recently, led by Michael Saylor of MicroStrategy along with the aforementioned Elon Musk in attendance. The panel is seeking to agree on standardised and transparent ways that Bitcoin miners can disclose energy usage of mining operations and the sources of that energy so as to alleviate wider concerns.

The cynicism towards this council comes from it flying in the face of the decentralised ethos of Bitcoin and doubts from some that this could be used as a means of balkanising Bitcoin. A scenario where some Bitcoin is declared greener or more environmentally-friendly than others would destroy the notion of fungibility of Bitcoin — where one Bitcoin is equivalent to any other (just as dollars or pounds sterling are).

Nonetheless, if the council can serve its stated purpose without trying to exert the personal agendas of those who take part in it, then perhaps the environmental FUD might be dealt with for good.

Source: Cointelegraph on Twitter

The same is true regarding China’s proposal to outlaw Bitcoin mining.

It’s suggested that Bitcoin miners in China have sold off some of their own Bitcoin, contributing to the radical drop in price. But the purpose of this sell-off seems like it could have been done to fund the move of their operations to neighbouring countries and territories where renewable energy and less-intrusive political regimes will allow them to set-up, unimpeded.

If China goes ahead with the proposed ban and operations migrate out of the sphere of influence of the Chinese Communist Party then it may just alleviate a number of the main FUDs too — not just the environmental, but the social and political ones as well.

It’s reminded me of the place of Bitcoin in my life

With all that said, the crash in price and the days since as I’ve read and listened to analysis and explanations trying to understand it have reminded me of something — it’s just Bitcoin.

It’s something I’m interested in and curious about. I think that blockchain computing, Web 3.0 and cryptocurrencies will play a significant part in the future and I’ll continue exploring, experimenting and learning about them.

It’s also a strand of my investment strategy. I hope that the strategy as a whole will shape a better, more stable and more comfortable future for me and my family but none of that relies solely on Bitcoin reaching a particular price or my investment in it guaranteeing a certain return.

I haven’t pinned my hopes on it — instead it’s a supplementary investment that offers the possibility of asymmetric reward for the level of risk that I’ve taken and will remain as such provided I only ever risk what I’d be willing to lose.

For that reason if the price drops further or drops again in future as it did during the bloodbathening — I’ll be buying the dip and holding on, just as I have this time around.

Note: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.

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