Bitcoin Survives Massive Market Shock in Stable Condition
Bitcoin has been on a tear over the last couple of weeks, where it rose almost 60% over this very brief period of time. What goes up that much can also come down a lot as well.
Bitcoin investors have been all smiles during April and May, where we have seen the price of bitcoin double over this month and a half. The rise has been particularly sharp during the month of May, where most of this increase has occurred.
2019 has been a year where Bitcoin prices have managed to finally achieve sustainable growth, or at least have us thinking that the asset may be maturing more and we may see less of the major volatility that it is so famous for.
When we look upon the massive rise and fall that has struck the Bitcoin market, it is the rise that actually caused it, where we moved up way too much way too quickly to be sustained, or at least to avoid a lot of profit taking, which is what does us in here.
As far as Bitcoin fell from December 2017 to December 2018, all we really did was wipe out the gains that it saw over just a three-month period from September to December 2017, and while seeing it touch $3000 again might be pretty scary when you fall to here from $19,000, we also need to remember that it started 2017 at a little over $700, so even $3000 doesn’t look so bad from this perspective.
A great deal of Bitcoin’s previous gains was left to stand when we bounced off of $3000 and reversed our course last December, whether or not people held it over all this time. As big of a correction as this was, it was not really that unreasonable, especially since Bitcoin prices are driven exclusively by changes in sentiment.
Stocks are driven primarily by sentiment but there are other actors that do base their decisions upon fundamentals, where they reference the value of the underlying business and will step in more at certain times where they see a bargain. There are no bargains with Bitcoin though as it has no intrinsic value apart from its trading value, which means that the market decides its value completely and with no limitations.
April and May 2019 Did Look a Lot Like November and December 2017
May’s rise in price has been reminiscent of Bitcoin’s runup in 2017, and although just doubling its price in 6 weeks may not quite be in the same league as its biggest move ever, the tripling in the four weeks leading up to the big crash, this is a big time run up that risks a correction in the same way that the big move from November to December 2017 did.
On Friday, this all came home to roost, particularly from a massive seller that unloaded so much Bitcoin at once that the price dropped 20% from a single trade. However, it quickly rebounded to recover $1000 of this $1500 drop.
The impressive thing about this order was how well the market handled it, and this speaks a lot for how relatively orderly and liquid the Bitcoin market is, even though sending the price of something tumbling 20% by a single seller is certainly not very stable. It was the response that was the most impressive feature of all this though as we quickly got back to normal and the damage was minimized.
We may wonder what would happen to an index if this happened, and this is of a far greater magnitude than anything that may have prompted the Flash Crash, where almost all of the so-called damage was done by program trading. Imagine what this program trading would have done with an order like this and you can count on things going far below what the initial trade would have brought us to.
A trade of this magnitude is a severe shock on the market and how we deal with shocks like this gives us a lot of insight into how responsive a market is, how much stress it can take and deal with, and the Bitcoin market actually handled this like a champ. Someone was out to take profits now with no regard to price, as it would have made a lot more sense to unload it over time, and Bitcoin stood and delivered and then recovered quickly from it. This all speaks well of Bitcoin.
When the dust from this settled, we’ve been able to limit the damage to just the gains that we’ve made earlier in the week, with Friday wiping out these gains, but we’re still up over 40% month to date, and the month is only a little over half over now. That’s not exactly an asset busting up before our eyes or a reason to be bearish on Bitcoin right now.
Some think that when Bitcoin’s dominance of the cryptocurrency market rises to a certain percentage, such as the 60% that it recently rose to, that precipitates corrections, but this is really just a side statistic, as it is the extent of these run-ups themselves that are being corrected, not its market share.
Bitcoin Can Still Go Up a Long Way, But the Moves Must Be More Gradual
Some moves are of a magnitude that aren’t even sustainable with even as volatile of an asset as Bitcoin, where the volatility present extends the market’s capacity to sustain it. There really isn’t any concrete limitation to this, like stock investors thinking that a stock may be overvalued, as there is no valuation at all with Bitcoin, but we do need to be aware that people still may get uncomfortable with big moves like the one we saw during the first 2 weeks in May.
This correction has brought out all the cynics though, although that should not surprise us, and this now includes people who think that Bitcoin has now been broken technically. Bitcoin’s chart looks fine though, and all we’ve done really is just give back a few days’ profit and we’ve established a new floor right where we started the week, which is far from a technical catastrophe or even one that noteworthy.
There is a lesson here though and that’s when we see a big spike like we just saw, we are certainly at risk for a pullback, part of the way anyway. If we broke below where we were on May 12, around $6800, then we may rightfully worry that the fun may be over for now, and this single order did get us close to that but we ended up moving well away from this zone in short order, which is ultimately a bullish sign not a bearish one.
What’s stopping Bitcoin from moving back up towards $20,000 is simply people’s comfort level with it. Friday’s sell-off told us that while this level of comfort has been increased, it’s not that it cannot be breached at least temporarily.
Friday’s events should have us feeling even more comfortable about Bitcoin’s longer-term prospects, as if people were looking to pile on, this would have been the perfect opportunity, seeing its price get hammered by 20% by a single order. A lot of stop orders got triggered by this, much like what happened during the Flash Crash, but traders rushed in very quickly to rescue us from all this and things are looking pretty stable once again.
The future still looks bright for Bitcoin in the near term, and the further we go and the more history that we accumulate in this new era of Bitcoin trading, after the fall we could call it, the more we can become confident in its having an enduring appeal to investors and not just some flash in the pan that the critics have been preaching that it is.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
Contact Andrew: andrew@marketreview.com
Areas of interest: News & updates from the Consumer Financial Protection Bureau, Trading, Cryptocurrency, Portfolio Management & more.