Bitcoin has lost more than 70% of its value this year. Part of it was the crypto civil war, part of it was panic selling. Read our take on the recent developments.

If a cat had nine lives, Bitcoin (BTC) would have more than 300. How often have we heard this: Bitcoin is dying, it’s time that you get a new job.

But we’re not there yet.

Yesterday, 25th November, BTC had plunged as low as $3,456 on Coinbase, following the massive decline the week earlier. It temporarily jumped back to $4,120 and stood at $3,937 this morning at the time of writing.

Still, BTC is down more than 70% this year.

For those invested in BTC, it’s hard to stay calm. After the epic rally in 2017, with BTC marking a high of $19,666 in December, cryptocurrencies have seen their worst year ever.

Some say we are seeing the end of cryptocurrencies. Others say this is merely a correction.

Bitcoin Cash and the crypto civil war

Most market observers agree that the decline of BTC was triggered by the launch of Bitcoin Cash.

Bitcoin Cash is a hard fork of the BTC blockchain. A hard fork is like a software upgrade that not everybody on the network agrees to. As a result, there will be some users upgrading to the new software, while some will continue using the old software.

The reason behind the hard fork were rising fees on the blockchain network. This resulted in a push by some in the community to increase the block size. Thus, the hard fork Bitcoin Cash was introduced on 01st August 2017. It began trading at about $240. At that time, BTC traded at $2,700.

A year later, in November 2018, two rival camps – Bitcoin ABC and Bitcoin SV – caused a hard-fork chain split of Bitcoin Cash resulting in two new chains. On 15th November 2018, Bitcoin Cash ABC traded at $289 and Bitcoin SV traded at $96, down from $425 for the unsplit Bitcoin Cash on 14th November.

“Any time there are hard forks things tend to trade weird and strange, so I think people are trying to take some risk off the table,” says Meltem Demirors, Director of Development at Digital Currency Group.

The crypto civil war resulted in increased market volatility. Retail investors got concerned and institutional investors were deleveraging to decrease their risk exposure. Investors started selling their coins. As the price broke through certain support levels, stop-loss orders were being executed and prices fell even further, triggering a downward spiral.

Forget about 2017

Q4 2017 is not a reasonable benchmark.

Yes, 70% of value being wiped off hurts. However, BTC was extremely overvalued last year and should never have reached $19,666 under fair value considerations. 2017’s price run was mostly triggered by speculative gambling.

If you take out 2017’s exceptional rally, the current downward trend is actually a fairly reasonable correction. It’s just that the perception has changed after what happened last December. But if we treat Q4 2017 as an outlier and look at the 5-year average, BTC isn’t doing that badly right now.

Bitcoin is a bet on technology adoption

Meanwhile, traders are sitting on the sidelines. $3,000 is the next line of defense.

Stephen Innes from Singapore-based capital market service OANDA says if Bitcoin “sees a run toward  $3,000, the market is going to be a monster and people will be running for exits.”

Likewise, Genesis Capital Trading expert Michael Moro told CNBC that, “You really won’t find [the floor] until you kind of hit the 3K-flat level.”

Bitmex CEO Arthur Hayes said the BTC price could drop to as low as $2,000.

Whether the bottom is at $3,000 or $2,000, what we’re really interested in is the long-term perspective.

“This is about the fifth or sixth 75 percent-plus drawdown that we’ve seen in the 10-year history of Bitcoin. And so, if you have that [long-term] lens, I don’t believe institutional investors really ultimately care where the price of bitcoin ends in 2018 simply because they’re looking at things three to five years out,” says Michael Moro.

And he’s exactly right.

Bitcoin is a bet on the adoption of cryptocurrencies as a payment method. Already today, Bitcoin is clearing three times more transactions annually than payment service provider PayPal. That indicates, that Bitcoin is more than just a gamble for speculators, it has real economic value.

Right now, there are mainly two types of investors in the market: speculators and users. The next wave of adoption will be institutional. That will happen once proper government regulations are in place, which we already see emerging. Take Liechtenstein’s Blockchain Act as an example.

You could also look at Bitcoin as a commodity. If it’s a commodity, it should trade around break even. Right now, it costs around $7,000 to mine one bitcoin. From this point of view, BTC is drastically undervalued and should eventually return to its fair value.

Whatever way you want to look at it, it’s probably already too late to get out by now anyway. Best is to sit back and relax; or even buy more now as prices are down. We most likely won’t see any 2017-like hike anytime soon, but as long as there is economic use to Bitcoin, it won’t get buried in the annals of history.


Image: ©Shutterstock