Should I buy bitcoin? Why cryptocurrency is on the verge of a bear market

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Bitcoin was set to enter a bear market on Tuesday as the volatile crypto asset suffered a double-digit drop in the past 24 hours.

A single bitcoin BTCUSD,
-1.55%
was trading at $ 47,944.40, down around 10%, on CoinDesk, which represents a slippage of around 18% for the popular digital asset from its rise over the weekend to a record high of 58 $ 332.36. The world’s No.1 crypto had fallen at least 20% from this recent peak at some point in the past 24 hours, meeting the commonly used definition of a bear market.

True, bitcoin’s swings are not unusual, but crypto’s reputation for volatility is one reason opponents argue that it is not suited to serve as a medium of exchange.

Why is the price of bitcoin falling?

Indeed, that was a point made by Treasury Secretary Janet Yellen on Monday at a New York Times DealBook conference.

“As far as it is used, I fear that it is often for illicit financing. It’s an extremely inefficient way to transact, and the amount of energy consumed to process those transactions is staggering, ”said the former Fed chairman.

Yellen’s comments were cited as a reason for Bitcoin’s recent losses. However, Yellen’s assessment of bitcoin as an inefficient medium of exchange is an important point and one that has been raised by bitcoin bulls in the past.

Using a volatile asset in exchange for goods and services doesn’t make sense if the asset can drop 10% in one day, or rise 80% in two months, like bitcoin did. in 2021, argue critics.

To put it more specific, over the past 12 months bitcoin has registered 8 corrections, defined as a drop from a recent peak of at least 10% but not more than 20%, and two bear markets, which are defined as declines of 20% or more, according to Dow Jones Market Data.

By comparison, the S&P 500 SPX index,
+ 0.95%
and the Dow Jones Industrial Average DJIA,
+ 0.60%
had a correction which then fell further into a bear market over the past year and GC00 gold,
+ 0.02%,
considered one of bitcoin’s rivals as a store of value, has suffered two corrections (including the current one) but has avoided slipping into a bear market over the past year.

Some have also attributed the recent Bitcoin pullout to comments from new crypto enthusiast Elon Musk, managing director of electric car maker Tesla Inc. TSLA,
+1.32%,
who tweeted on Saturday that the price of bitcoin and the # 2 most popular crypto, Ether ETHUSD,
-2.32%,
which runs on the ethereum blockchain, were too high.

Tesla shares, meanwhile, fell into bearish market territory, falling more than 20% from the record close on January 26. Analysts have linked the weakness to the fall in bitcoin, with Tesla announcing earlier this month that it had bought $ 1.5 billion worth of cryptocurrency.

To verify: Tesla share drop is likely linked to bitcoin betting

Other theories on bitcoin’s slowdown include the idea that the decline is largely due to profit taking, with some holders taking profits near its weekend peak. that some owners took a profit selling bitcoin during its weekend peak.

Should I invest in bitcoin?

Many critics warn that bitcoin and other cryptos are purely speculative assets that could be regulated out of existence, knocking their price down to zero.

It’s just not clear what the future holds for cryptos or if bitcoin will specifically emerge as the dominant virtual asset to rule them all.

While Yellen’s comments have been attributed to the falling price of bitcoin and its rivals, the Treasury Secretary’s remarks could ultimately be seen as constructive for digital assets in general.

She also said, during her interview with The Times, that digital payments, which the Fed and other central banks around the world have explored, could lead to “faster, safer and cheaper payments,” which ‘she described as important goals.

This is hardly a hit on bitcoin, but it is not a full-fledged endorsement of cryptocurrency or other cryptos, as digital assets backed by trust funds or central bank digital currencies are considered in a different class from crypto-backed assets.

Craig Erlam, senior market analyst at Oanda, in a note Tuesday called bitcoin’s pullback a bit of a hiccup and said he wouldn’t be surprised to see it take back $ 50,000 at some point. but notes that it had been overbought and was vulnerable to a downturn.

Read: Bitcoin Still Falls Below Key $ 50,000 Level After Yellen Calls It “Extremely Inefficient”

“The bitcoin fever didn’t go away all of a sudden because Musk questioned the price, but his Twitter feed has certainly become a primary catalyst for the market,” Erlam wrote. “That probably won’t stop it from climbing back above $ 50,000 in the very near future and possibly reaching new highs soon after.”

He speculated that bitcoin could reach $ 42,000 or $ 40,000 before stabilizing.

Either way, it’s worth remembering that bitcoin experienced a parabolic surge in December 2017, hitting nearly $ 20,000 before collapsing early in the following year to a low of $ 3,000.

This low probably crushed new investors who bought the asset out of fear of missing out, or FOMO, but long-term owners or “HODL”, who cling to their bitcoin through thick and thin, were still enjoying huge gains.

Yves Lamoureux, chairman of macroeconomic research firm Lamoureux & Co., told MarketWatch that average investors should be especially careful with bitcoin and cryptos.

“Bitcoin offers the same predictable pattern,” he said. “Nobody wants it until we get parabolic … so most [people] be decimated, ”said Lamoureux.

Ultimately, bitcoin buyers should be wary.

Why has bitcoin risen sharply over the past year?

Bitcoin’s recent rise to market value surpassing $ 1 trillion on Friday has been more broadly linked to the increased involvement of institutions in the asset.

These include PayPal Holdings Inc. PYPL, which in November opened its cryptocurrency platform to all U.S. customers after leading a narrower rollout, has helped drive bitcoin prices up sharply in recent weeks and months.

More recently, Musk’s Tesla announced it acquired $ 1.5 billionn in bitcoin in January and that it may accept the world’s No.1 digital asset for payment in the future, helping to provide a boost to crypto assets at large.

To verify: Is bitcoin heading for $ 100,000 in 2021 or is its price ‘unsustainable’?

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