Bitcoin (CCC:BTC-USD) dipped below $50,000 per token during the Dec. 4 weekend. It is also now trading below $1 trillion in market capitalization. This provides an opportunity for value seekers. As the cryptocurrency experiences weaknesses near the end of the year, expect to see sharp moves either way.
The most likely reason for the weaknesses is what traders call “consolidation,” according to Coin Telegraph magazine. Some sellers, likely due to tax reasons, are forced to sell before the end of the year. They either want to harvest profits to use against other short-term or long-term losses or vice versa.
As it stands, Bitcoin is now well off of its three-month high of $68,492 on Nov. 11. As of late Dec. 5, it was trading at $49,141. That represents a drop of 28.3% from its highs.
And Bitcoin is not the only crypto to take a hit recently. Ethereum (CCC:ETH-USD), the second-largest cryptocurrency is down as well. Ethereum recently peaked at $4,765 on Dec. 1 and was down 12.8% to $4,155 as of late Dec. 5.
What Happened to BTC Last Weekend
One trader called consolidation “a slow grind-up.” By that, he meant that various prior sticky points would have to be recaptured. This includes the $50,000 price mark, the trillion-dollar market cap (at just above $53,000) and various other previous highwater marks.
Decrypt called the drops on Friday, Dec. 4 and Sat., Dec. 5, a “crypto market crash.” At one point, the magazine pointed out, Bitcoin was down more than 18% in one 24-hour period and ETH tokens were down 15%.
The magazine blamed the omicron variant of Covid-19 and Nasdaq weakness. But the most likely reason is simply year-end tax selling. Those with profits in Bitcoin may want to cover losses from other crypto or stock trading, and those with losses in Bitcoin may want to reduce profits elsewhere. This is not wholly uncommon in the world of stocks, especially during the last week of November and the first week of December.
The reason is simple. Those with losses know they cannot rebuy their position for at least 31 days after the sales. So, just in case a rebound occurs early in the new year, they need to make their sales during the first week or so of December. This occurs very often, no matter the reason that sparked the downturn.
This explains the main reason why Bitcoin and other major cryptos have moved “in tandem,” as Decrypt magazine puts it, with the stock market. It has to do with the tax-related motivations of sellers more than anything else.
Where This Leaves Investors in Bitcoin
The best thing most investors can do with this situation is to be patient and try and average into your position. If you don’t already have a Bitcoin stake, it is probably a useful opportunity to begin accumulating one.
For one, even if the price of BTC keeps falling, at least you have the advantage of buying in at a point where the price is falling.
The math of this situation is very appealing. Let’s say you buy in today and the price falls another 25%. If you then buy in another position of equal dollar value, you gain a leverage effect.
For example, if the BTC price falls 25% from, say, $49,000 to $36,750, and you buy an equal or larger position at this lower price, you can pick up leverage. That is because if the price subsequently moves from $36,750 to $49,000, you gain 33.33% in value. This is a greater gain than the 25% loss. So an equal or larger bet at the lower price helps you to more than cover the loss.
This is why many value investors like to take an initial toe-hold stake in a falling security. They then take successively larger positions as the security drops. This is what many investors might end up doing now while Bitcoin and Ethereum prices are weak.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.