Cryptos: Should I buy bitcoin? Why the cryptocurrency is on the verge of a bear market

United States

Bitcoin was on the brink of entering a bear market Tuesday as the volatile crypto asset suffered a double-digit plunge over the past 24-hour period.

A single bitcoin BTCUSD, -14.90% was trading at $ 47,944.40, down around 10%, on CoinDesk, representing a roughly 18% skid for the popular digital asset from its rise over the weekend to a record at $ 58,332.36. The world’s No. 1 crypto had tumbled by at least 20% from that recent peak at one point over the past 24 hours, meeting the commonly used definition for a bear market.

To be sure, bitcoin’s wobbles aren’t unusual but the crypto’s reputation for volatility is one reason naysayers contend it isn’t suited to serve as a medium of exchange.

Why is bitcoin’s price down?

Indeed, that was a point raised by Treasury Secretary Janet Yellen on Monday during a New York Times DealBook conference.

“To the extent it is used I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering,” the former Fed chairwoman said.

Yellen’s comments have been cited as a reason for bitcoin’s recent losses. However, Yellen’s assessment of bitcoin as a inefficient medium of exchange is an important point and one that has already been raised in the past by bitcoin bulls.

Using a volatile asset in exchange for goods and services makes little sense if the asset can tumble 10% in a day, or surge 80% over the course of a two months as bitcoin has done in 2021, critics argue.

To put a finer point on it, over the past 12 months bitcoin has registered 8 corrections, defined as a decline from a recent peak of at least 10% but not more than 20%, and two bear markets, which are defined as falls of 20% or more, according to Dow Jones Market Data.

By comparison, the S&P 500 index SPX, -0.34% and the Dow Jones Industrial Average DJIA, -0.15% have had one correction that then fell further into a bear market over the past year and gold GC00, -0.33%, considered one of bitcoin’s rivals as a store of value, has had two corrections (including its current one) but has avoided slipping into a bear market over the past year.

Some have also attributed bitcoin’s recent retrenchment to comments from newfound crypto enthusiast Elon Musk, the chief executive of electric-car maker Tesla Inc. TSLA, -3.68%, who tweeted on Saturday that the price of bitcoin and the No. 2 most popular crypto, Ether ETHUSD, -16.69%, which runs on the ethereum blockchain, were too high.

Tesla shares, meanwhile, have tumbled into bear-market territory, dropping more than 20% from a Jan. 26 record close. Analysts have tied the weakness to bitcoin’s slide, with Tesla earlier this month announcing it had purchased $ 1.5 billion of the cryptocurrency.

Check out: Tesla stock’s drop likely related to bitcoin bet

Other theories on bitcoin’s downturn include the idea that the drop is down largely to profit-taking, with some holders taking profits near its weekend peak. that some owners have taken profits, selling bitcoin during its weekend peak.

Should I invest in bitcoin?

Many critics warn that bitcoin and other cryptos are purely speculative assets that could be regulated out of existence, knocking their price to zero.

It is just not clear what the future holds for cryptos or if bitcoin specifically will emerge as the dominant virtual asset to rule them all.

Although Yellen’s comments were credited with bringing down the price of bitcoin and its rivals, the Treasury secretary’s remarks could be ultimately viewed as constructive for digital assets in general.

She also said, during her interview with the Times, that digital payments, which the Fed and other central banks across the globe have explored, could lead to “faster, safer and cheaper payments,” which she described as important goals.

That is hardly a knock on bitcoin, but it isn’t a full-throated endorsement of the cryptocurrency or other cryptos since fiat-backed digital assets or central bank digital currencies are viewed in a different class to cryptographically backed assets.

Craig Erlam, senior market analyst at Oanda, in a Tuesday note, characterized the bitcoin pullback as a bit of hiccup and said he wouldn’t surprised to see it retake $ 50,000 at some point, but notes that it had been overbought and was vulnerable to a downturn.

Read: Bitcoin drops further below key $ 50,000 level after Yellen calls it ‘extremely inefficient’

“Bitcoin fever hasn’t gone away all of a sudden because Musk has questioned the price but his Twitter feed has certainly become a primary catalyst for the market,” Erlam wrote. “That probably won’t stop it surging back above $ 50,000 in the very near future and probably hitting new highs shortly after.”

He speculated that bitcoin could hit $ 42,000 or $ 40,000 before it stabilizes.

In any case, it is worth recalling that bitcoin enjoyed a parabolic surge back in December 2017, nearing $ 20,000 before it crashed early in the following year to a low of $ 3,000.

That low likely crushed new investors who bought into the asset for fear of missing out, or FOMO, but long-term owners or “HODL”-ers, who hold on to their bitcoin through thick and thin, were still enjoying monster gains.

In the end, bitcoin buyers should beware.

Why has bitcoin risen sharply over the past year?

The recent run-up in bitcoin to a market value exceeding $ 1 trillion on Friday has more broadly been tied to institutions becoming more involved in the asset.

Those include PayPal Holdings Inc. PYPL, which back in November opened up its cryptocurrency platform to all U.S. customers after conducting a more narrow rollout, has helped drive bitcoin prices sharply higher in recent weeks and months.

More recently, Musk’s Tesla announced that it had acquired $ 1.5 billion in bitcoins in January and that it could accept the world’s No. 1 digital asset for payment in the future, helping to deliver a fillip to crypto assets broadly.

Checkout: Is bitcoin headed to $ 100,000 in 2021 or is its price ‘unsustainable’?

 Yves Lamoureux, president of macroeconomic research firm Lamoureux & Co., told MarketWatch that average investors need to be particular cautious in bitcoin and cryptos.

“Bitcoin offers the same predictable pattern,” he said. “Nobody wants it until we go parabolic…then most [people] get decimated,” Lamoureux said.