In recent weeks, the behavior of Bitcoin has been quite peculiar. In this sense, investors try to find an explanation for such behavior, but what is really happening with the cryptocurrency?
On November 26, the price fell by 9% in a single day, going from 18,769.40 USD to 17,076 and halting the upward trend observed since the beginning of September. However, in the following days the cryptocurrency recovered its price in the markets with force and just four days later it had already exceeded the previous peak.
An unpredictable trajectory
This abrupt drop in the price of Bitcoin is nothing more than a reflection of the high degree of volatility to which this cryptocurrency has always been subject, since its first block of units was “mined” on January 3, 2009. Yours It is a success story if we look at its evolution in the market (it started by selling at around 0.2 USD), but also marked by strong corrections. All this has made Bitcoin a great opportunity for investors, especially those more willing to sacrifice the security of their portfolios in order to enhance their profitability.
The last few years were no exception to the general trend, and were also marked by strong volatility. After reaching a high of $ 19,650.01 at the end of 2017, 2018 saw a downward trend in the form of saw teeth, that is, with sporadic appreciations. Last year, 2019, also witnessed a behavior difficult to predict for the price of Bitcoin: after a stagnant first quarter, it grew strongly in less than 2 months, to lose ground again in the rest of the year. In 2020 the trend seemed to have reversed, but the collapse of the world’s stock markets in March due to COVID-19 also ended up dragging the cryptocurrency, which ended up losing 44.72% of its value in just 10 days.
However, the prices of this financial asset once again surprised analysts with a relatively rapid recovery in the second quarter of the year and, after alternating with some periods of stagnation, they have staged a real “rally” since the end of September. This growth to historic levels was in turn slowed by a sudden 9% drop on November 26, fueling investors’ doubts about the security that Bitcoin can provide.
Why has it fallen?
The explanations in this regard are varied but not exclusive, which indicates that possibly the contraction in the price of the main cryptocurrency in the world is due to a complex interaction of various factors. First, the rise in the cost of financing in futures contracts since the beginning of November can be interpreted as a sign that the markets are “overheating” and that the time for taking profits is near.
This is not a minor issue, as an increase in the cost of futures transactions usually indicates that investors are less willing to sacrifice their short-term capital in exchange for future returns, and that, therefore, the relative valuation increases. of security and liquidity. For this reason, a phenomenon such as that experienced by futures in November frequently precedes periods of downtrend in which market agents prioritize profit-taking.
Another possible reason is rumors that the US Treasury Department may be preparing restrictions on the use of Bitcoin. Although they have not been confirmed to date, they could have been enough to finish convincing the most prudent cryptocurrency holders to take short positions.
A third factor to take into account is the anti-cyclical nature that it has shown so many times throughout its history. Recall that between November 20 and 25, the S&P 500 index rose by 2.02% accumulated, the Nasdaq 100 did it by 2.06% and the Dow Jones Industrial by 2.08%. Some European stock markets also registered increases in the same period, such as the German DAX and the Spanish IBEX 35.
One of the most paradigmatic cases of this stock market euphoria, led by technology companies, is that of Tesla; with a growth in the price of its shares of 17.24%. There have also been strong increases on Google, Amazon and Facebook.
In principle, it would be difficult to argue that an uptrend in stocks can explain a Bitcoin crash, but it is possible to understand what happened if we analyze all these factors together. As we have already mentioned, the largest cryptocurrency in the world may show a countercyclical nature but it is not necessarily a value of this nature. At the beginning of the year, without going any further, it grew accompanying the optimism of the markets in January, and in March it collapsed, dragged by the generalized fall in the stock markets around the world.
We should therefore look for an explanation in the general context of financial markets at the end of November. In an environment where investors become relatively more reluctant to commit resources in the long term, a negative rumor about Bitcoin can scare many holders of the cryptocurrency by pushing them to sell. In such a situation, the growth of other securities could have acted as a catalyst by offering better investment alternatives for those who operate in the financial markets.
The days after November 26 witnessed a strong revaluation, but they were not enough to refute the finding that it is an asset characterized by its volatility. This does not mean that it is no longer attractive to all investors, but somewhat less so for those who are more likely to sacrifice profitability in exchange for security.
Is it really a haven for investors?
“The great advantages of gold and cryptocurrencies are their wide acceptance in the world, the rigidity of their offer and the fact that they are not subject to arbitrary decisions by any monetary authority.”
All this means that today there is a wide debate among economists about whether we can really consider it a safe haven value. The main argument against this hypothesis is precisely the high degree of volatility that we have already mentioned, since the possibility of obtaining large profits is to some extent offset by heavy losses that appear suddenly with some regularity. Another reason could be that, frequently and as has happened in the first quarter of 2020, its evolution can be cyclical in nature.
On the contrary, many analysts argue that, despite the aforementioned factors, it represents a safe haven for investors who are willing to bet on cryptocurrencies. In a previous article, we already commented on how this asset is appreciating rapidly in many South American countries due to the instability of the region’s currencies. With some nuances, we can extend this reasoning to the rest of the world, although it is logically expected that this phenomenon will be attenuated in countries with stronger currencies.
In this sense, the great advantage that Bitcoin presents is that it has a nominal maximum limit. In other words, the number of units in circulation can never exceed 21 million. This means that the money supply is fixed and predictable, which is not the case with any currency that can be printed from a central bank. In a context such as the current one, where monetary authorities around the world are betting on expansionary policies, a currency that is not subject to the arbitrariness of governments can be an important refuge for investors.
One possible finding that this cryptocurrency can be considered in this way is its apparent correlation with the safe haven value par excellence: gold. The joint evolution of both values reached a maximum of 70% in the second quarter of the year, and although this correlation weakened in November due to the volatility of the cryptocurrency, many analysts already recommend it as an alternative. to the golden metal.
The great advantages of both are their wide acceptance in the world, the rigidity of their offer and the fact that they are not subject to arbitrary decisions by any monetary authority, although Bitcoin tends to be more volatile and still has to face great challenges in the regulatory sphere. . For this reason, there are many who today wonder if a future awaits us where international transactions will be anchored in fixed value cryptocurrencies, as was the case under the gold standard. Such a scenario is undoubtedly very difficult to predict, but it was also difficult just 20 years ago to imagine realities as current as working with robots or generalizing teleworking around the world.