What History Tells Us About Finding Bitcoin’s Bottom

What History Says About Finding Bitcoin’s Bottom

Bitcoin is down about 70% from its November all-time high, and the crypto market as a whole is in what is best described as an extreme fear cycle after a stablecoin run wiped out $45 billion and a couple of other companies eye insolvency.

That means it’s time for experienced investors to start looking at getting back in.

So said Stephen Pair, CEO of bitcoin payments firm BitPay, in an interview with PYMNTS’ Karen Webster.

He’s not saying buy bitcoin now. But he is saying it’s time to figure out when a bottom’s going to form.

“Over the life of bitcoin, which is more than a decade now, it is yielding returns over time in excess of 100% a year, on average,” Pair said. “An experienced investor would look at the market and say, ‘OK, we’re down to $20,000. If we go three months, six months, and it’s just kind of hovering around $20,000, then you start to see it creep up to $23,000, $25 000, $28,000,’” it’s time to look at the history of bitcoin’s bull-bear cycles.

Do that and you’ll find that there is a big run-up to all-time highs — about $68,000 in the recent bull cycle — followed by a drop to the previous all-time high in the last bull cycle. In bitcoin’s case that’s about $20,000 in 2017.

“That would be right around where it is now,” Pair noted.

Coming Back?

It’s worth noting that the current bull market for bitcoin — and for crypto as a whole — began in December 2020, just as people were getting their first pandemic stimulus checks. And the bear market, which began in November, coincides with the end of the last pandemic support programs like the child-care credit — taking away a lot of discretionary income.

That raises the question: Will the retail investors come back, and if so, what will cause them to do so — particularly when a lot of them lost their shirt buying during the run-up? That’s despite the average dollar cost for investors hovering at $23,000 — about $2,000 more than its Thursday (June 16) price around $21,000.

“The fundamentals haven’t changed,” Pair said. “It still functions exactly the way it always has… it’s never missed a quarterly report.”

Investing in bitcoin is a lot easier than the stock market, where a huge number of factors could affect when or if it comes back, he said.

Trimming the Hedge

So, what happened to the much-hyped idea of bitcoin as a store of value that would act as a hedge against inflation?

It certainly hasn’t been acting as one. Bitcoin has actually been doing a pretty good job of tracking the stock markets up and down.

“[T]hat’s speculation about a future state,” Pair said. “We’re still in the early adopter and speculative phase.”

Bitcoin is still a risk-on asset, purchased when investors’ appetite for risk is greater, he said. The inflation hedge isn’t here yet, but it will be in the long run.

“[I]n the short term, you have to expect that when people are selling everything, they’re going to sell bitcoin along with it,” Pair said.

Beyond Bitcoin

Case in point: Many of cryptocurrency’s current troubles began in the second week of May, when the No. 3 stablecoin, TerraUSD, and its sister, LUNA, suffered a run and imploded, becoming virtually worthless within a week.

Read more: TerraUSD’s Price Collapse Shows Vulnerability of Dollar-Pegged Cryptos

What that shows is that “not all cryptos are created equal,” Pair said.

As an algorithmic stablecoin that maintained its dollar peg not by holding a reserve of cash and highly liquid assets like Treasuries, but by an arbitrage incentive using the LUNA token as a partner, there was “a fundamental flaw in how that stablecoin was implemented, and somebody took advantage of it,” he said.

The developers tried selling off the $3.5 billion bitcoin reserve TerraUSD was in the process of building to try to support its dollar peg, but “that ultimately failed,” Pair said.

Another problem that hit this month was when decentralized finance (DeFi) lending platform Celsius halted withdrawals, leading to speculation that it is insolvent. Celsius offered people who staked crypto to be loaned out a staggering 18% yield — a not uncommon rate that is increasingly seen as riskier than casual investors believe.

See more: Crypto Lender Celsius Under Investigation by Several US State Regulators

Pointing to bitcoin’s long-term growth, Pair said, given that bitcoin “is yielding returns in excess of 100% a year on average, why would you risk that with a lending product trying to get another additional 18% yield on that? That, to me, never made sense because of the risks.”

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