Bitcoin (CRYPTO: BTC) has been in a bearish trend this year. As of this writing, it is down about 11% for the year. Prior to that, it spent the last months of 2021 selling off. It has been a rough few months for Bitcoin fans. But if history is any indication, BTC may bounce back. Throughout its history, Bitcoin has suffered many drawdowns of 50% or more. Apart from the most recent one, it bounced back from all of them. So if past trends continue into the future, then Bitcoin should rise once more.
With all that being said, past trends do not predict future events. Any volatile asset that eventually went to $0 had a prior history of ups and downs. In many cases, it probably looked like the asset had been reliably recovering from its drawdowns… until it didn’t. In light of this, we have to ask whether Bitcoin will keep going down long term. In this article I will review a few possible reasons for the Bitcoin price decline, so you can decide for yourself whether it is likely to continue.
Image source: Getty Images
Increasing competition
One factor that may be influencing Bitcoin’s price is competition. There are thousands of cryptocurrencies in existence, and at least a few dozen of them have substantial market caps. Ether (CRYPTO: ETH) is worth about half what Bitcoin is worth right now, and has been slowly narrowing the gap. As of this writing, ETH had a positive return for the trailing 12-month period, while BTC had a negative one. So perhaps ETH is stealing some of BTC’s thunder. It’s impossible to say exactly how much of the “potential” money being spent on Bitcoin is instead going to ETH–crypto investors are under no obligation to reveal their thinking. But it seems at least plausible that the thousands of “alt coins” out there are taking away some of the demand for Bitcoin, and negatively impacting its price.
Regulatory pressure
Next up, we have regulatory pressure. Generally speaking, crypto regulations are becoming increasingly common worldwide. China has all but banned crypto, and other countries are regulating it to one extent or another. In Canada, exchanges now have to report customer data to the tax authorities. Similar rules are being implemented elsewhere. All of this takes away from what was once a major draw of cryptocurrency–privacy. It could be taking away some of the demand, too. In 2021, there were a number of stories about China’s crypto bans, and Bitcoin generally fell in the immediate aftermath of each one. It seems likely that crypto investors are genuinely concerned about the regulatory pressure, and hedging their bets.
Normal volatility
Last but not least, we have normal volatility. Bitcoin has always been volatile, and 2022 has been no exception to that general trend. In 2018, Bitcoin fell 80% after reaching a $20,000 high. There was a similar drawdown starting in 2013 and proceeding through to 2015. Bitcoin recovered, but not before some fair weather traders sold out at losses.
On this point, it makes no difference whether you hold Bitcoin, or an “institutional” Bitcoin product like the Purpose Bitcoin ETF (TSX: BTCC.B). In past articles, I’ve touted funds like BTCC.B as tax-efficient Bitcoin products. Indeed they are, assuming you realize gains on your holdings, because they can be held in TFSAs. However, such products do not spare you the volatility that holding Bitcoin entails. If you can’t stomach an 80% crash, perhaps look for a non-crypto investment for your portfolio. Bitcoin’s volatility is legendary, and a long-term up-trend doesn’t mean you won’t sell at a loss.
