Boom-Bust-Boom: A Bitcoin Saga
Bitcoin is down more than 50% from its November high.
Bitcoin's past indicates that it could drop even further.
In the past, Bitcoin has logged triple digit percentage gains following long periods of decline.
Can Bitcoin put together another big bull run?
Triple Digit Gains
According to Investopedia, the average annualized return since the S&P 500 adopted 500 stocks into the index in 1957 through Dec. 31, 2021, is 10.67%. The annualized return for Bitcoin from the $2.22 valley in 2011 to the 2021 close of $47,000 is 171%. The S&P 500 has provided comfortable retirements, while Bitcoin has provided early retirements with Lambos, but does it have another 500% gain in it?
Anyone who has followed or invested in Bitcoin, has learned to get comfortable with the boom-bust-boom nature of the cryptocurrency. Nothing falls as hard as Bitcoin when it comes to investments. In 2013 it dropped 80% in two days. On the other hand, few investments bounce back like Bitcoin has in its past. I took a look at five major boom-bust-boom periods from Bitcoin's past to get an idea of what could be in store for Bitcoin's future.
In August of 2011 Bitcoin hit a high of $11.85, which doesn't seem like much today. But in 2011, it was a very big deal. In its beginnings, Bitcoin traded for less than a penny, so hitting $1, and then $10 plus, was a big deal.
After hitting $11.85, Bitcoin spent the following two months in decline and would bottom out at $2.22, marking an 81% loss in value over two months. 10 months after trading down to $2.22 Bitcoin broke past the old peak, registering a 439% gain from its valley to its new high. 439% in 10 months, not bad at all
In 2013 Bitcoin reached another peak of $259.34. After reaching that peak, it would drop 80% in two days and bottom out around $45.00. The cryptocurrency would take seven months to recover. From the valley to the break of the old peak, Bitcoin registered a 488% gain.
In December of 2013 Bitcoin would peak again. After trading to over $1,000 per coin, Bitcoin would spend the following 23 months in decline. After bottoming out at nearly $178, it would take 15 months for the cryptocurrency to recover and break past the December 2013 peak.
Bitcoin's run in 2017 stands out for a lot of reasons. It's when I noticed local news stations reporting on the state of Bitcoin. 2017 was the year that people who used hundreds of Bitcoins to buy a coffee in 2014, realized that they had consumed the most expensive cup of coffee they would ever drink. 2017 was also the year we saw a condo be sold for Bitcoin only. It was a wild year, and after peaking again 2017, Bitcoin would spend the next 12 months in decline. It took 23 months to trade from its December 2018 bottom, to the break of the old peak.
The beginning of 2021 greeted investors with Meme Stock Mania. From January 8, 2021 to January 21, 2021 Bitcoin experienced a slight decline, as speculators briefly left the crypto currency to invest in GameStop ($GME) and other meme stocks. As the meme stock trade started to unwind, money found its way back into Bitcoin.
It was a pleasant surprise when Bitcoin topped $63,000 in April of 2021. When it crossed above $60,000, Bitcoin enthusiasts were speculating that the coin could hit $100,000. But the good times would soon come to an end, and Bitcoin would decline over the next three months. It would bottom out at $29,807, marking a 53% loss of value from the April high. But after hitting its bottom in July 2021, Bitcoin would spend a short four months recovering from its most recent fall in price. Bitcoin would trade above its old peak in November 2021.
29,000 and Where we are Now
After peaking again in November 2021, Bitcoin has been in decline for the last six months. What I'm trying to figure out is if this is going to be a 12 month decline similar to the one that started in 2017, or a 23 month decline, like the one that started in 2013?
In reviewing a few of Bitcoin's past busts-and-booms, four times in the past Bitcoin declined 80% or more from its peak. As of this writing Bitcoin is down 56% from the $68,789 high it traded to last November. An 80% drop from those prices would bring its price to just under $14,000 a coin. At less than $14,000 are we still thinking Bitcoin is the future or are we thinking it's over for Bitcoin?
Technical traders - traders who use charts to make their investment decisions - often note areas on a chart where something important happened. For instance, where an investment stopped rising in price, where an investment stopped dropping in price, the range that an investment trades in if it is range bound, and the upper and lower levels of the range. All of these areas on a chart can provide clues to what an investment will do in the future.
In the case of Bitcoin, the range between $28,000 and $30,000 is where it stopped falling, when it pulled back from its April 2021 peak. It also found support around the same price range back in January of 2021. Since this price area is where Bitcoin has stopped declining on a few occasions, traders will mark this area as an important level of support, since this is where Bitcoin's price found support in the past.
Last Thursday, when Bitcoin's price briefly fell to $26,000, it was quickly bought up by investors, and the buying caused the price of Bitcoin to trade back to $29,000. The buying that occurred on Thursday supports the theory that Bitcoin bulls had buy orders set at the support level of $30,000 and slightly below, and once the price of Bitcoin reached the support level, buy orders triggered. Since those buy orders were triggered, Bitcoin has held steady. But, if Bitcoin fails to start rising in price in the near term, investors who purchased the coin between $30,000 and $26,000 will sell their Bitcoin and reset their buy orders at another level of support. The next significant level of support would be in the range of $21,000 and $18,000, which is where Bitcoin peaked in 2017. If that area doesn't hold, then we're looking at the $13,000 range, a level Bitcoin traded to in 2019 after the 2017 collapse.
I don't consider myself to be a master stock technician or chart wizard, but I understand the basic concepts of support and resistance, and I also know that most of the time, picking a price level where a security should stop falling in price is an educated guess at best, so be warned.
What to Do?
The history of Bitcoin says do it, go in, buy some Bitcoin and be prepared to buy some at even lower levels, and in three years sell it, buy a Lambo, talk to your peers and haters like you're a crypto investing genius, and live happily ever after.