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Bitcoin at a six-month low, should you buy?

Will it dip further?

SAMAA | - Posted: Jul 21, 2021 | Last Updated: 2 months ago
SAMAA |
Posted: Jul 21, 2021 | Last Updated: 2 months ago

Bitcoin, the world’s first and most expensive cryptocurrency, fell below the psychological barrier of $30,000 on Tuesday, its second dip below that level in a month. Other popular crypto assets, such as Ether and Dogecoin also tumbled along with global stock markets, but, unlike digital currencies, the latter bounced back.

Since December 2020, cryptocurrencies have given enormous returns (ranging between 1000% to 10,000% by some coins) to investors all over the world, but the rally slowed down amid Chinese government’s crackdown on crypto miners and exchanges followed by actions and warnings from Britain, Japan, and Canada.

As the bearish trend in crypto world enters the third month, investors are wondering whether to buy this dip before it bounces back or wait for prices to drop further so they could buy at an even lower price.

A careful study of technical analysis and recent statements by financial gurus to the western media indicate Bitcoin is likely to fall below $23,000. Since other currencies are closely following price movements of Bitcoin, they are likely to fall as well.

On Tuesday, Bitcoin was trading 37% below its 100-day moving average and was worth less than half of an all-time high of $65,000 it touched mid-April. According to a report by Fortune.com, fund managers are expecting a strong dip to $22,000, and technical analysis seems to back that.

Among the fund managers with bearish outlook is billionaire Jeffrey Gundlach. Also known as the Bond King, Gundlach predicted the price of Bitcoin would fall below $23,000. Referring to the price chart of Bitcoin, Gundlach said it is scary and looks like a massive head-and-shoulders top.

It is a pattern that forms a head-and-shoulder image with a low price point (start of a rally) on the left, called left shoulder, precedes the peak price point, called the top, which is followed by a dip to the right, called right shoulder. The line joining the lowest points on either side is called neckline.

If one looks at the price chart of Bitcoin, it indicates the next neckline will be formed below the $23,000 level. Even Ether’s price chart is depicting a similar pattern with a neckline formation around $1500 level–Ether is currently hovering $1900.

Gundlach, is the CEO of Doubleline Capital that manages assets worth $135 billion, said cryptocurrencies have underperformed stock markets this year. The Bond King’s bearish prediction contrasts his earlier take when, in November 2020, he called Bitcoin a good hedge against inflation.

Digital coins have become quite popular in the last decade or so as evident from the phenomenal success of Bitcoin, the world’s first cryptocurrencies. People who support the concept have called it “breakthrough technology” that will change the way financial systems work.

A cryptocurrency is different from conventional digital currencies because it bypasses intermediaries, usually a bank, and enables instant peer-to-peer payments. Nakamoto launched it in the wake of 2008 financial crisis to give people control over their money and exclude banks or governments from the process.

It works on blockchain technology—a decentralised model of ledger. That is, no central bank or government can place any limit on its production or transfers. In a cryptocurrency, a vast network of computers validates all transactions by solving a complex mathematical problem, making it impossible to counterfeit a coin.

This solves the problem of double-spending. These computers are called miners and whoever validates the transaction first gets a reward, also a digital coin. This new currency is added to the system without creating inflation.

Since Bitcoin’s launch, hundreds of other cryptocurrencies—together known as AltCoins—have been introduced and become a new asset class for investors. The combined market cap of all cryptocurrencies is around $1.2 trillion.

The increasing popularity of cryptocurrencies has, however, become a concern for legacy banks and central banks across the world because they take control away from them and give it to the people.

This money is not regulated and given the anonymity around; it can be used for tax evasion, money laundering, other criminal activities. Another issue with cryptocurrencies is their highly volatile nature.

Financial regulators around the world have warned investors not to put their money in what they call a highly speculative asset class and one often used for scamming people.

To counter the rising popularity of cryptocurrencies, governments across the world are exploring different options including regulating cryptocurrencies or even launching their own digital currencies.

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