Many of us stood slack-jawed when the Bitcoin price reached an astounding $20,000 towards the end of 2017. Since then, however, the bitcoin price has done nothing but disappoint. As of the time of writing this article, a single bitcoin is valued at under $8,000.
How did the hype train derail? We’re going to look at the four main reasons why the bitcoin price is so depressed right now. We’ll also try to answer that big question: Will it bounce back?
Reason 1: Every Bubble Bursts
Whether you’re talking Dutch tulips in the 1600s or the subprime mortgage crisis of 2008, every bubble bursts. Make no mistake, Bitcoin was certainly in a bubble throughout much of 2017. Bubbles are defined as having a rapid increase in asset prices followed by a sharp contraction.
That is exactly what we saw in 2017, when Bitcoin broke $1,000 for the first time early in the year. It would continue its meteoric rise until reaching nearly $20,000. 2018 brought it back down to size and 2019 has mostly been a continuation. That is, until the recent spike above $10,000.
Is Bitcoin Back, or Is the Bubble Back?
Most evidence points to this jump as being a sort of “echo” of the previous bubble. Many people jumped in thinking “Bitcoin is back!” only to find that it wasn’t. The long story short here is that Bitcoin’s price increases haven’t been based on solid fundamentals but rather excited speculation from casual investors looking to make a quick buck.
As investors find fewer returns each time, we see less and less trading activity on the Bitcoin network. Indeed, the frequency of small transactions continues to decrease. Total volume is down to nearly half of its peak values.
So what does all this mean? Essentially, the first bubble in 2017 attracted lots of flies to the barbecue, but now that much of the meat has been consumed, they’re moving on. With fewer small players in the game, we see less activity on the network. That reduced activity means less demand for Bitcoin, which is keeping the prices low.
Reason 2: Mining Difficulty Increased
Bitcoin’s programming is designed to make the supply of bitcoins ever more difficult to access. Mining difficulty increases over time in a pre-planned manner, and it also can increase in response to increased mining. Soaring prices in 2017 and 2018 meant that mining was quite profitable.
There was a time when AMD graphics cards and mining ASICs sold at over double their retail price. People who got into the mining scene at the right time could make a killing, but those who arrived late had to pay a high entry fee. The result has been more hashing power than ever, which ironically has hurt those same miners.
How Hashrate Hurts Miners
Despite sinking prices, the overall hashrate has remained steady over the last three months. In fact, it’s higher now than at any point in the history of Bitcoin. That’s making it harder to earn the limited supply of Bitcoin that’s left.
While conventional wisdom would suggest that harder hashing means a smaller supply of Bitcoin, resulting in higher prices, the opposite actually occurs when most of the supply is already locked up in wallets. Indeed, analysis of charts shows that when miners are profiting, BTC moves more freely across the network, which leads to increased activity and a higher bitcoin price.
Reason 3: Holders Keep Holding
Although this somewhat summarizes the last two points, there’s another detail here that needs to be addressed. Bitcoin wealth is concentrated, just like fiat currency, at the top. Back in 2017, Bloomberg suggested that 40% of all the Bitcoin wealth was held by 1,000 wallets.
Shortly after, another report showed that 97% of all BTC was held in just 4% of the addresses. Of course, it’s difficult to say how many people that represents as one person can have infinite addresses. Nevertheless, it seems certain that there are a handful of “Bitcoin Whales” who hold a mountain of BTC at any given time.
Why Nobody Is Spending Their BTC
Those whales aren’t shaking their tails. Fewer big splash trades hit the market, and it seems that most of the big holders are content to keep on holding. Many people continued to stock up while the price was high. For some investors, holding may just mean waiting for a chance to make a profit. BTC bought at $12,000 seemed like a deal at one point, but now it looks like a loss. Would you sell and lose, or wait for a better opportunity?
Some are also holding on for the halving. The halving is an event that causes mining rewards to be cut in half. It’s programmed to occur after a certain number of bitcoin have been mined. Estimates put the halving at some time in May 2020.
Historically, every halving has resulted in a price increase. However, it’s difficult to predict how this one will move since so much has happened in the years between halvings. Many holders predict the price will rise and are content to sit on their mountain of digital gold until the halving passes.
Reason 4: Altcoin Interference
During the bubble days, money moved from BTC to altcoins at an unprecedented rate. In fact, Bitcoin represented 84% of the crypto-currency market at the end of February 2017. And during its peak at the start of 2018, it slid down to just 32% of the market.
Much of that money never came back. Bitcoin hasn’t broken the 70% barrier since the bubble burst, although it has remained rather steady in the high 60s. Essentially, some of the wealth that Bitcoin accrued on its best days has left permanently.
The Little Coins that Couldn’t
A large number of niche altcoins simply appeared and vanished, like a blip on the radar. Similar to the dot-com bubble of 1999, many altcoins were little more than white papers with good ideas on them. People threw money into coins that would ultimately evaporate into nothing.
Reason 5: The Technicals Don’t Lie
Finally, a quick technical analysis raises the alarm bells. A double-top formation, marking the end of a head-and-shoulders pattern, formed prior to this crash. Most people expected a drop, albeit one to the support levels in the $8,200 range or, at worst, a decline to $7,500.
Technically, It Looks Bad
The drop was much worse than expected, which has shaken investor confidence. To trust BTC to go back to its $10,000+ levels means we need to reestablish support between $8 and $9k. That hasn’t happened yet, and there is no sign that it will according to the charts. Some sources suggest we may have to drop further before things get better.
Can the Bitcoin Price Rebound?
So, will the Bitcoin price return to its previous highs of 2019? Or are we stuck waiting for 2020? It looks like the latter situation may be necessary.
From a technical perspective, we may have to slide all the way down to the low-mid $6k level, where there is strong support for higher prices. However prices would be highly unlikely to break through this floor. In fact, $6,000-6,500 might be a great place to add to your position if you are looking to do so.
What Else to Watch for
Further crackdowns on crypto in Asia are likely to keep the price from springing upwards. China shows no willingness to regulate disruptive technology, instead continuing its path of obliteration. Although Western governments have shown a tendency to accept BTC and its brethren, there still isn’t enough institutional support to encourage demand.
We anticipate a bit of fervor around Bitcoin in the weeks prior to the halving. Chances are this will attract some of the casual investors back into the fold for a while. That could be the catalyst we’ve been waiting for. In fact, if that buzz develops, we could see a significant price hike occur around the halving. Since the mining reward will drop, but the costs of mining won’t, miners are likely to expect higher prices to compensate.
Excitement before the halving combined with the actual economic impact of the event itself could build the perfect storm for a bull run. The question is not if there will be another bull market for Bitcoin, but rather when it will land, and how much of the carcass will the bears have devoured in the months before.
The Last Word
Always remember that betting on Bitcoin, like any financial asset, carries some risk. You should do your due diligence and be mindful of market fluctuations. We’ve covered the five main reasons why the bitcoin price has fallen hard, but there are other variables.
Currency movements are just as political as they are economical. Keep your eyes on the budding trade deals between China and the US, the crypto regulations emerging out of the Americas and Europe, and even the development of state-sponsored cryptos. The best investor is the most informed one. Good luck out there.