What’s behind the cryptocurrency price drop?
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Veteran cryptocurrency investors have been here before. Bitcoin has dropped 55% over the past 6 months, down from its all-time high above $67,000 in November 2021. Ethereum is down 57% over the same period. To put things into perspective, major cryptocurrencies have experienced a drop of between 57% to 85% over the past six months.
In rand terms, Bitcoin went from its all-time high of R1,020,000 to R445,000 over this period.
Some perspective is needed here. After peaking above $20,000 in December 2017, Bitcoin lost 84% from peak to low over the next year and then recovered to break new all-time highs. It was the same story with Ethereum, which lost more than 90% of its value after peaking in 2017, and then rallied.
What’s behind this drop? Inflationary fears and rising interest rates across the world are prompting a flight to safety. As a consequence, higher-risk assets have been pummelled globally, including tech stocks such as Netflix, Zoom, Peloton, Robinhood, Roku, Meta Platforms (Facebook) and the list goes on.
Compounding the price drop is the highly leveraged position a large portion of the investor market has in cryptocurrency. Highly leveraged investors are being margin called to sell off their position thus causing a snowball effect on the price.
Bitcoin over 12 months in USD
There is a correlation between cryptocurrencies and tech stocks, as a casual look at the graphs below will demonstrate. Take Netflix and Meta Platforms (Facebook) as an example: both have drops of 32% and 62% respectively over the last year.
Netflix stock price over 12 months
Meta Platforms (Facebook) stock price over 12 months
In the more than 10 years that cryptocurrency has been in existence, these drops have been treated as buying opportunities. A tried and tested strategy for investing in cryptocurrency is to add positions whenever a drop of 20% or more is recorded. Many investors have done this repeatedly throughout the years, in good times and bad. And it’s worked fabulously.
Another strategy is dollar-cost averaging. Buying $100 worth of cryptocurrency every month over the last four years, regardless of price, would have yielded a net return of 72.5% and a total portfolio value of $27 000.
Dollar-cost averaging – buying $100 of Bitcoin a month over 4 years
Source: http://www.dcabtc.com Despite significant losses in cryptocurrency prices, we are seeing significant cryptocurrency adoption across the world as buyers continue to hold rather than trade their cryptos. We are also on the cusp of seeing major regulatory initiatives from the US to Europe and South Africa. It’s developments like these that continue to drive the price of cryptocurrencies over the long run.
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