Investment in cryptocurrencies is certainly not for the faint hearted. While I talk about Bitcoin (BTC-USD), the big crash in Terra (LUNA-USD) is worth mentioning. LUNA-USD has plunged by more than 90% within 24 hours with the crash being triggered by a decline in algorithmic stable-coin TerraUSD (UST-USD).
Coming back to Bitcoin, there is no good news either. The world’s first decentralized cryptocurrency traded at an all-time high of $68,990 in November 2021. From those levels, BTC-USD has already tumbled by 55%.
Does it imply that its an end to the bull market for the cryptocurrency?
Let’s revisit the historical price trend to get some perspective.
In a first major rally (in the last few years) for Bitcoin, the crypto surged to highs of nearly $19,000 in December 2017. Almost 12-months down the line, Bitcoin was trading 82% lower from highs. Investors had almost written-off the cryptocurrency.
Again, in April 2021, Bitcoin surged to $63,000. By July 2021, the crypto plunged to $31,000 levels. Clearly, this is not the first time that Bitcoin has witnessed a correction of more than 50%.
I believe that it will also not be the first time that Bitcoin reverses sharply. Of course, it’s impossible to talk about a timeline. However, the correction in cryptocurrencies had cleansed the excesses in the system. Speculators will be out of the game. Investors have a good opportunity to accumulate for the long-term.
It’s also important to understand why Bitcoin has corrected, in particular. Yes, the cryptocurrency world is prone to regulatory headwinds. However, that’s not the catalyst for the correction. Treasury Secretary Janet Yellen has already indicated that the U.S supports responsible crypto innovation.
The biggest reason for the correction is the rate hike by the Federal Reserve and visibility for more aggressive hikes. It’s worth noting that some high-flying growth stocks have plunged by 50% to 80% in the last few months. So, cryptocurrency, being high-beta, was bound to witness a sell-off.
The next obvious question is: Is the worst over?
I believe that Bitcoin is already oversold. However, given the uncertainties in the global economy, I would still consider gradual accumulation.
One reason to believe that the selling is overdone is the possibility of a recession in the U.S. or a global recession. If the Federal Reserve is convinced that the recession probability is high, rates hikes will be less aggressive. On the contrary, a recession would imply renewed rate cuts.
While liquidity tightening is a fear, the scenario can easily change to expansionary policies. This would imply a renewed rally for Bitcoin, high-growth stocks and gold.
To a large extent, I believe that Bitcoin is still in a stage of price discovery. These phases are likely to be associated with high volatility.
Analysts talking about Bitcoin surging to $500,000 be over-optimistic. Similarly, analysts predicting the end of cryptocurrencies are significantly pessimistic. I would take the mid-path and allocate some portion of my cash to Bitcoin and few other crypto assets. Even if it’s just 5% to 10% of my total allocation to risky asset classes.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions 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.
