Bitcoin (CRYPTO:BTC) has spent much of this year in a pronounced crash. As of this writing, it was down 22% for the year and still falling. Earlier in the year, Bitcoin fell in tandem with tech stocks, with which it has been correlated recently. It appears this phenomenon of BTC-NASDAQ correlation is still going on. In this article I will explore the recent drawdown in Bitcoin and whether it is likely to continue.
Why Bitcoin is crashing
Lately, Bitcoin’s price has been strongly correlated with the prices of tech stocks. BTC spent most of this year falling along with the NASDAQ, which is tumbling on interest rate worries. It’s hard to say why Bitcoin and the NASDAQ have been so strongly correlated lately. In the early days, Bitcoin was not particularly correlated with any other asset, but, more recently, it has been trading similarly to tech stocks. This could be due to institutional investors now getting into BTC and putting it in “growth”/tech portfolios. If that’s what happening, then we should expect Bitcoin to fall for as long as tech stocks fall.
Apart from that, there’s not really much going on that would explain Bitcoin’s crash. There hasn’t been much news on the regulatory front lately, and various jurisdictions are still in the process of making BTC legal tender. Some countries, like El Salvador, have already done so. So, there hasn’t really been a whole lot of bad news on the “fundamentals” level. It could be that some short-term-oriented traders are simply taking profit on Bitcoin after having bought it cheap years ago. At today’s prices, Bitcoin bought in 2019 can still be sold at a handsome profit.
What could stop it from crashing?
If Bitcoin is crashing because of growth portfolio managers selling — as I suspect to be the case — then a few possible things could eventually end the crash.
One would be interest rates stabilizing. Higher interest rates increase the “risk-free” rate of return and make risky growth assets less desirable. The U.S. Federal Reserve is currently in the midst of a year-long interest rate-hiking spree. The markets aren’t sure what to make of it and are sending stocks lower. When interest rates finally stabilize after the “six or seven” rate hikes coming this year, then maybe tech and things like Bitcoin will find a bottom.
Another factor that might stop the Bitcoin crash would be another country adopting it as legal tender. When El Salvador introduced BTC as legal tender, Fortune 500 companies in the country immediately started accepting it for payments. If another country makes the same move El Salvador did, then perhaps that would generate some extra demand that would take BTC higher.
Foolish takeaway
It’s a tough time for Bitcoin right now, but history shows that BTC has a remarkable ability to bounce back from its drawdowns. Over the years, Bitcoin has seen many dips — it has usually bounced back. Today, we’ve got major institutional investors buying Bitcoin, and even pure-play Bitcoin funds like Purpose Bitcoin ETF.
These funds generate a significant amount of buying (in other words demand). They also provide an additional reason for investors to buy Bitcoin, as they can be tax-sheltered, which mitigates capital gains tax (one big drawback Bitcoin faces). Does all this institutional adoption mean Bitcoin will go up? No. But it does argue that the coin will not evaporate into thin air overnight.
