Is Bitcoin's biggest price drop yet to come?

The cryptocurrency has dropped back below the key $20,000 support level after a brief resurgence during the summer

A Bitcoin-themed art installation in Miami. The digital coin fell at the weekend after the Fed chief said interest rate increases would continue. AFP

It been a tough year for Bitcoin investors, with the cryptocurrency having retreated substantially from its record high of $68,990.90 in November.

The biggest cryptocurrency on the market staged a recovery in recent weeks as part of the summer equity rally after falling to $17,581 in June.

However, it has tumbled once again below the key level of $20,000 and there are fears among analysts that the price could drop much further this time.

In 2020, Bitcoin surged by 292 per cent and by 59 per cent in 2021.

What has caused the recent fall?

Bitcoin, which has a market capitalisation of $954.51 billion, dropped below $20,000 at the weekend after US Federal Reserve chairman Jerome Powell warned against prematurely loosening monetary policy, repeating that the central bank would continue to raise interest rates to rein in inflation, which hit a 40-year high in June.

Global cryptocurrency and equity markets fell on the news. Bitcoin dropped a further 2.3 per cent on Monday to $19,527, marking a fifth successive day of falls.

“In recent times, the price of Bitcoin has developed a strong link with the Federal Reserve's monetary policy, such that as the Fed tightens policy, the price of Bitcoin falls,” said Naeem Aslam, chief market analyst at Avatrade.

“This association between the Federal Reserve's monetary policy and the price of Bitcoin has become stronger in recent times and it is a big reason why the Bitcoin price crashed from its all-time high.”

Investors and traders were more at ease when the price was at about $25,000 earlier this month, but with the bulls having failed to drive prices higher, “many market participants now fear the worst selling is yet to come as a result of this”, Mr Aslam said.

How far could Bitcoin fall?

It is looking like a return to the lows registered in June after Bitcoin broke through the $20,000 support level at the weekend, according to analysts.

“The sell-off in equities should further pressure Bitcoin lower,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank. “The next natural target for Bitcoin bears stands near $17,500, the June dip, then the $15,000 level, the next psychological support.”

Fairlead Strategies’ Katie Stockton sees long-term support between $18,300 and $19,500, Bloomberg reported, while Fundstrat strategist Mark Newton flagged some key areas in the $19,000 range, with a “real area of importance” around $17,500.

“The $15,000 and $13m [$13,198k] price points will be the primary emphasis and attract some offers,” Mr Aslam said.

If Bitcoin's price nears the September 2020 low of $10,760, “there will undoubtedly be many interested buyers”, he added.

For traders, the 50-day simple moving average is a key level to look for when trying to decipher the direction of the trend in the market, he said.

However, if the price is trading above this average, then bulls are in charge of the market and the chances favour higher highs. When the price drops below this key moving average, it is usually safe to assume that bears have taken control of the market, he said.

Bitcoin is trading below its 50-day simple moving average but above its 200-day simple moving average.

“As a result, BTC bulls are still holding out hope that the recent breach is phoney and if the price stays over $20,000, there is nothing to stop it from continuing its ascent.”

Why did Bitcoin fall to $17,000 in June?

That was down to FUD — or “fear, uncertainty and doubt”, an acronym used by cryptocurrency enthusiasts to dismiss negative information — which can lead to panic selling.

That was against the backdrop of 40-year high inflation, rising interest rates, recession fears and the collapse of the stable coin Luna when it unpegged from the US dollar and wiped out more than $17bn in cryptocurrency value in May.

How is Ether faring?

It is having a rough ride as well. The second-biggest cryptocurrency slid 4.1 per cent on Monday to $1,422.67, continuing a decline from about $2,000 a couple weeks ago. It has been fluctuating before its much-anticipated Merge upgrade, which is due in mid-September. It has fallen 61 per cent this year from $3,769.70 on January 1.

The upgrade is set to move Ether to a more energy-efficient and environmentally friendly system.

It currently consumes about 45 terawatt hours of power a year and experts estimate the upgrade will use 99 per cent less energy than the current set-up.

____________________

Watch — What is Bitcoin and how did it start?