Financial

Bitcoin fall is history repeating itself, say experts

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Bitcoin is following the same pattern it has a number of times in the past, experts say.
Bitcoin is following the same pattern it has a number of times in the past, experts say.

South African crypto-currency enthusiasts believe the spectacular fall in the value of Bitcoin, the most popular digital currency, is history repeating itself, and the price will go up again at any time.

This as the price of Bitcoin hit its lowest this year, which saw it trade at below $4 000. Earlier in the year, the price had somewhat stabilised to around $6 500. At its peak in December last year, Bitcoin's value dramatically surged to a whopping $20 000.

At the time of publishing, Bitcoin had emerged from the below $4 000 muddle to trade at $4 165.

All in all, the world's leading crypto-currency is down more than 80% from its climax last year. While falling, Bitcoin did not go down alone, as it also dragged its peers such as Ripple and Ethereum to the ground.

The South African Revenue Service has indicated it is looking to track and tax Bitcoin trades. The revenue authority will clarify the tax implications of transacting in crypto-currencies like Bitcoin in either an interpretation or practice note early next year.

Same pattern

For Petri Redelinghuys, a trader and founder of Herenya Capital Advisors, Bitcoin pulling back 80% is something he expected.

"We are still at the beginning stages of discovering Bitcoin's utility. I think Bitcoin is following the same pattern it has a number of times in the past, based on a repeating bubble-type movement.

"If I think back to the last time Bitcoin rallied 10 000% and then crashed 80%, it was picked up by mainstream media, everyone got super-excited and got in. It rallied to $1 200 and then the bubble popped because the only people buying were speculators."

Redelinghuys observes that after the 80% crash, many miners left the game and for a period of one year (second year after the $1 200 peak), it basically traded sideways until the blockchain mining reward was halved.

Now with fewer miners around and less supply in the market, prices naturally started drifting higher (in the third year after peak) until in the fourth year after the peak the previous high of $1 200 was breached, at which point the mainstream media once again picked up on it and the price exploded to $20 000, he says.

"I think we are seeing the same pattern emerge now. We will see massive swings in price (a few standard deviations around a parabolic mean) until it settles at fair value in 2040. Each swing will be slightly smaller on the upside, but give around a 70% to 90% drawdown. I also think these price swings will coincide with the mining reward halving every four years."

Volatile future

Farzam Ehsani, co-founder and CEO of VALR.com, notes Bitcoin has been very volatile and will remain so for the foreseeable future.

"This is a function of speculation, which is expected for the stage we are in, and does not reflect the underlying fundamentals of the crypto-currency world."

Ehsani also points out it's important to note Bitcoin has dropped over 80% in price three times in the past and came back strongly after each bear market.

"If one looks at the fundamentals, there is an unprecedented number of developers involved in this space, as well as a great amount of investment for projects that are being built, including ours at VALR.com.

"Institutions have also recently made clear their intention to enter the crypto-currency world. Just as the steep price increase last year didn't mean Bitcoin was taking over our financial system, so too does this slump not imply that Bitcoin is dying."

He adds it's clear that towards the end of last year, Bitcoin was overbought, with lots of retail money coming into the ecosystem for fear of missing out.

"With the quick rise in price, traders took profits, pushing prices down. Leveraged positions would have been closed out, pushing the price further down and this trend continued as the bull market lost steam. Over the last couple of months, Bitcoin had been stable around the $6 500 mark; however, a couple of weeks ago, there was a fork in the Bitcoin Cash crypto-currency (a separate crypto-currency from Bitcoin despite the similarity in names) that pitted two communities against one another."

He notes this led to a sell-off in crypto-currency as these two communities needed to liquidate some of their holdings to support their respective versions of the Bitcoin Cash fork. This trigger caused a further sell-off as traders were uncertain about the implications of the Bitcoin Cash split, says Ehsani.

Trading bots

Alan Robertson, YOU# co-founder, says there are a number of theories for the Bitcoin price drop but no one can say for sure.

These range from trading bots initiating buy or sell orders that are followed by traders that then start a domino effect, right through to 'whales' (large crypto-currency holders) making enormous trades, he says.

"It could also be that because of the nature of crypto-currencies, many holders around the world are first time investors who, unaccustomed to markets, spook easier and in essence overreact; exactly what happened last year when it peaked."

Robertson urges Bitcoin investors to be patient as all classes of investments go up and down.

"Consider the volatility of share prices. A recent Sasfin list of South African companies looked at current stock prices and compared them to their five-year highs. The list highlighted some spectacular falls: Aveng (-99%), Group 5 (-99%), Steinhoff (-98%), Ascendis Health (-85%) and Brait (-81%).

"You will also find companies such as MTN (-67%) and Woolworths (-50%) losing enormous value. Some of the other South African shares have reduced from their highs over the last five years. Among commodities, gold is down 33% since 2011, whereas in the same period Bitcoin is up 118 000%."

He believes interest in crypto-currencies seems to be tied too closely to whether the price is climbing.

"It suggests there isn't yet a deep enough appreciation of how the underlying technology is going to free the world from banking systems that charge us billions in fees and then let us down, from governments and central authorities that control the money supply and way too much of our lives," Robertson concludes.

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