The recent crypto crash has people wondering if and when to buy the dip. There are even people publicly recommending to buy this dip in Bitcoin (COIN) or related investments like the Bitcoin Investment Trust (OTCQX:GBTC). In this article I will explain why I am very skeptical of buying the dip in cryptocurrency at this stage.
A short price history of the Bitcoin crash
Looking at the price history of Bitcoin of the last year, the price graph looks like this:Source: Coinmarketcap.com
At first glance, you could say that the bottom might be in, since the extreme price increases since November have disappeared, and it looks healthy for prices to start increasing again at the moment. That is, from a pure technical perspective. But this understates the heavy price increases which occurred before November, and which are much less clear from this graph. I rather use a logarithmic graph for these purposes, since it is usually a much more fair way to comparing exponential increases in price.
This logarithmic graph looks a whole lot different, though it is one depicting exactly the same thing: Bitcoin’s price development during the last year. It underscores that the price of Bitcoin has truly behaved in an exponential way in 2017. In this graph, it also looks much less like Bitcoin could have reached a point from where it could start recovering again.
Let me be clear: I am not a technical investor or trader. But since too many people look at the ‘normal’ price graph and draw conclusions from this, I felt obliged to show how different your conclusions can be when you look at a different type of graph. In my opinion there are many reasons why the logarithmic graph is better suited for Bitcoin price depiction, the most important being that exponential price increases can not be shown correctly on a normal graph.
A longer and fairer comparison with history
Now let us take a look at a longer-term logarithmic graph of price development of Bitcoin to learn from the past. How was Bitcoin’s price development in comparable circumstances?
Two things are quickly obvious when glancing over this graph:
- Price increase was most exponential until the end of 2013, after this it slowed down.
- We can identify two major crashes of Bitcoin in the past: the end of 2013 and the summer of 2011. At both times the price slump lasted several years until it recovered.
- I can only identify one other dip which was as big as the current one and didn’t end up in a multi-year slump: the one happening from April 2013 until July 2013.
If we extrapolate the first finding, we can conclude that because the market capitalization of Bitcoin only increased since 2013, we can safely assume that the price development of the cryptocurrency will remain to behave in a less exponential way than in the past.
From the second finding we can conclude that the crash of cryptocurrency can also turn out to be a huge bear market instead of just a crash. It could last much longer than investors are expecting. In this case, buying the dip would not be such a good idea.
From the third point we can conclude that it does not always have to be the case that a crash as big as the current one leads to a multi-year bear market. The crash in April 2013 was sparked by the first big media coverage for Bitcoin leading up to a price of $237 per coin. After a huge price increase, it crashed quickly and badly, also aggravated by a long outage of the then-still-active MtGox. In a way, one could argue that the circumstances of April 2013 are comparable to today’s environment: there is a huge mainstream media coverage and many people who didn’t hear about cryptocurrency before are investing in it.
Of course, Bitcoin and other cryptocurrency continues to have its fair share of problems, including but not limited to:
- Huge energy use
- Governments cracking down on it even more than before
- Tether problems
- Transaction costs
- Exchange problems
- And many, many more
These types of problems have always been there in the past, and always seemed like they were an existential threat. But they have not prevented the price of Bitcoin to increase in the past, as illustrated by this nice picture:
Let me be clear: I do not dismiss these problems as being irrelevant. I am just saying that these types of problems have not prevented the price surge of Bitcoin in the past, and I am not sure they will prevent this in the future. But there is some reason to believe that these problems might be more relevant today than a couple of years ago: The market capitalization of Bitcoin and cryptocurrency is much higher now than in the past, many more people have invested in it and the media are completely on top of it. This would suggest that problems can reach a broader coverage by different sources and reach a more differentiated group of investors. Most of these investors have not been invested in Bitcoin since the beginning so they are sometimes no ‘believers’, and might know little of the cryptocurrency. Also, old long term investors might have cashed out, which has happened in the past.
There is a problem which I do feel can be very relevant for the future of Bitcoin, and it can be summed up in a single graph:
What this graph shows is that the dominance of Bitcoin is quickly declining. In July 2017 it briefly seemed that Ethereum was about to overtake Bitcoin as the world’s largest cryptocurrency, an event which was nicknamed ‘the flippening’. As you can see in the graph, the flippening never happened and Bitcoin retained its position as the largest cryptocurrency, but it is down from almost 100% in 2013 to about 35% today. A decreasing dominance does not have to be a problem if market capitalization of cryptocurrency keeps on increasing indefinitely, but on the long term, this is just not going to happen, or at least not at the degree to which it has in the past couple of years. Add to this the fact that Bitcoin is technologically inferior to many other cryptocurrencies, and it does not look impossible that Bitcoin prices could remain stable or even decrease on the longer term from here, even if other crypto’s would thrive.
To sum it all up
My biggest aim with this article is to make people think twice before buying the dip in Bitcoin. If the article achieved this, I am already a happy writer. Please be aware of the history of price development of Bitcoin and other cryptocurrencies and know that it is entirely possible for this dip to end up being a longer term bear market. The past has shown that this can happen, and in fact is has happened two times out of three.
Also be aware of all the problems surrounding cryptocurrency and Bitcoin, but do not let them blind you: in the past these problems have not prevented a huge upsurge in prices, though the situation is somewhat different today.
I am not providing any advice about whether to buy the cryptocurrency dip or not. I just want you to be conscious of the choice you are making.
Thank you for reading! If you have any ideas about Bitcoin or other cryptocurrencies, please let me know in the comment section below!
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.