Bitcoin (BTC-USD) has not been able to escape the selling pressures in the market, as almost all assets are feeling the heat. That includes cryptocurrencies, stocks and bonds, and it has created turmoil around the world. However, these types of declines also create opportunity.
The world’s leading cryptocurrency has fallen 67.7% from its all-time high, which it hit last year in November. That marks Bitcoin’s fourth-worst peak-to-trough decline. Each time we’ve seen a decline of this magnitude, long-term investors have eventually been rewarded. That’s the hope in this case, even though bulls’ beliefs are being put to the test.
Obviously navigating the current market environment has not been easy. It’s also clear that we’re in a “risk-off” state and in a bear market — both in equities and cryptos. Given that realization, investors must be careful.
They need to avoid leverage and only risk what they can reasonably afford to lose. I don’t think Bitcoin is going to zero. But could it fall another 30% to 50% or more? Everything could. Buyers must be responsible when buying the dip, unless they are willing to miss the low and wait for a new uptrend.
Does Bitcoin Still Have Long-Term Catalysts?
Of course Bitcoin still has long-term catalysts! Perhaps above all is the supply/demand dynamic. There will only ever be 21 million Bitcoins in circulation, while just over 90% of which has already been mined. Once we are out of supply, increasing demand will drive up the price of Bitcoin.
The biggest problem with that equation is pretty obvious: demand.
Simply put, buyers aren’t lining up and many over-leveraged holders are being forced to liquidate their holdings. Tesla (NASDAQ:TSLA), Block (NYSE:SQ) and Ark Invest are big buyers and owners of Bitcoin, but their holdings have been crushed. Microstrategy (NASDAQ:MSTR) is one of the bigger buyers out there and is now holding a roughly $1 billion paper loss in the cryptocurrency.
This is what happens when we’re in a bear market.
As Bitcoin evolves, I believe it will be a useful medium of exchange. Whether that’s for international exchanges or payments to other vendors. Cryptocurrencies also have a wide-range of possibilities, like smart contracts, as well as the ability to fund new markets like the NFT market.
Of course, all of that sounds ridiculous right now. However, it’s likely that once this bear market is over, buyers will come back and that will include corporations and institutions.
Not a Hedge for Inflation
Bitcoin responded well after the Covid-19 selloff in March 2020, rallying hard and eventually breaking out to new highs. The idea was that Bitcoin was now a go-to play against inflation as central banks around the world indulged in a massive round of stimulus.
Legendary trader and investor Paul Tudor Jones was one of the first big-name market participants to make the case for Bitcoin as a hedge against inflation. Initially, it worked quite well and Bitcoin easily outperformed gold.
However, it has become clear that Bitcoin has a stronger correlation with “risk-on” assets like high-growth stocks than it does to money supply or inflation readings. If that were the case, it would have been ballooning higher all throughout 2022, not stumbling lower with growth stocks.
When we look at the chart for Bitcoin, the leading crypto is coming into a very important area on the chart. Many bulls did not believe we would ever revisit this area.
I have been very much “in the middle” when it comes to Bitcoin and a few other cryptocurrencies. I’ve never tripped over myself with unwavering belief in these assets, but I’ve never been of the doom-and-gloom belief either. Perhaps it because I’m better at reading a chart than predicting the next wave of technology. I believe that eventually a large number of cryptocurrencies will be eliminated via regular market mechanics, however, others like Bitcoin and Ethereum (ETH-USD) will survive.
As it relates to the charts, it’s quite simple. Bulls need to see support come to life in the $19,500 to $20,500 area. We’re seeing it test its 200-week moving average now as it dips below and tests the psychologically-key area of $20,000. Just below that is the prior all-time high.
If Bitcoin can hold this area as support, it’s highly constructive for the bulls. That doesn’t mean the ensuing rally will be fast or easy, but it’s a great starting point for the cryptocurrency leader.
On the date of publication, Bret Kenwell did not have (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.