Though a 50% drop in value is an infrequent event in equity markets, bitcoin and other cryptocurrencies are experiencing their second drawdown of that magnitude in the past year as risk assets are getting pummelled during the first month of 2022.
Long-term holders of the coin are no strangers to these drastic swings in price, as evidenced by a long-term view of its price chart.
However, the past year, in particular, has been full of highs and lows for bitcoin and cryptocurrency markets in general.
After trading between $50,000 and $60,000 for several weeks between mid-February and early May 2021, several factors led to the slump in the coin’s value. On May 12, 2021, Elon Musk tweeted that Tesla will no longer accept bitcoin for car purchases due to environmental concerns.
Soon after, Chinese regulators tightened restrictions, banning financial institutions and payment companies from providing services related to cryptocurrencies. This would be a precursor to the country’s ban on trading and mining later in the year.
Enthusiasm lifts price
Despite these hurdles, bitcoin bottomed two months later and once again began its ascent. By the fall, cryptocurrency and blockchain enthusiasm had reached a fever pitch.
OpenSea, a marketplace for nonfungible tokens, otherwise known as NFTs, had its highest volume month for the year, with sales reaching $3.4bn. Projects such as Bored Apes and CryptoPunks saw surges in their price, with some even selling for millions of dollars.
Adding to the enthusiasm was the launch of a bitcoin futures ETF, the ProShares Bitcoin Strategy ETF (BITO), which gathered over $1bn assets under management (AUM) within the first two trading days.
The timing of this ETF’s launch, along with competitors Valkyrie Bitcoin Strategy ETF (BTF) and VanEck Bitcoin Strategy ETF (XBTF), marked a top. The cryptocurrency’s value has been falling ever since.
Will history repeat?
Though a drawdown of this extent is not unheard of for bitcoin, the launch of the ETF and cryptocurrency’s growing acceptance by the financial community means this might be many investors’ first taste of the wild price swings in bitcoin’s value.
These dramatic price shifts can work both ways. At the time of writing, bitcoin appreciated by 7.4% in the prior 24 hours.
Most of this price appreciation happened within a span of a few hours rather than being a steady climb over that 24-hour period.
Another data point that might calm new crypto investors is looking at historical price action. The price of bitcoin has always recovered from drawdowns of this magnitude, often reaching record highs soon after.
Time will tell
While this thought might bring comfort to those new to investing in cryptocurrencies, this outcome is by no means guaranteed. But those who think history will not repeat itself are tasked with answering why this time is different. Given the shifting nature of the macro and economic backdrop, detractors have no shortage of things to point to.
Inflation is higher than it has been in decades. The Federal Reserve is poised to begin tightening, with many blaming loose monetary policy for a bubble in risky assets like cryptocurrencies. And bitcoin’s long-awaited entry into the US-listed ETF space could have signalled a cap on pulling new investors into the space.
But bitcoin has risen exponentially above many hurdles in its past, surprising naysayers for most of its history. In some ways, its demise could be more surprising than an eventual recovery to new all-time highs.
This story was originally published on ETF.com
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