Bitcoin crashes by up to 30%: is it a good time to buy?

·Columnist
·4 min read

Bitcoin, the most popular cryptocurrency in the world, lost 30% hitting a three and half month low of $30,066, in the session on 19th of May. It recovered during the day and was down 10% at $38,580 at close.

The cryptocurrency has dropped 54% from a record high of $64,895 it hit on April 14. It is also heading for its first monthly decline since November 2018.

The decline in the price of bitcoin refreshed memories of the crash in 2018 - from $19,345 as on December 16, 2017, crypto fell by 83% to $3,229, a year later on December 15, 2018.

The trigger for the shake-out is believed to be China's move on Tuesday to ban financial and payment institutions from providing cryptocurrency services. It also warned investors against speculative crypto trading.

Last week, the price of bitcoin nosedived by 12% after Tesla CEO Elon Musk said his company was suspending plans to accept the cryptocurrency as payment for electric vehicles, citing bitcoin's high environmental cost as reason for the move, after months of being bullish on it.

Bitcoin is a digital currency that does not use banks or any third party as a medium. It is governed by a string of cryptographical codes, which are believed to be very tough to break, with a finite supply of 21 million units.

The price of bitcoin has witnessed a spectacular rise in the pandemic era from around $10,000 per unit in early September 2020 to more than $60,000 in mid April 2021.

Bitcoin price graph (Source: www.coindesk.com)

The sharp increase in price had led to speculation that a crash is imminent. Believers of the cryptocurrency see it as a healthy correction primarily on account of some profit booking. They believe it presents a buying opportunity for investors who have missed the previous rally.

Some technical analysts predict more losses ahead, noting the fall below $40,000 represents a breach of a key technical barrier that could trigger more selling.

However, ARK Investment CEO Cathie Wood, one of the staunchest backers of bitcoin, in an interview with Bloomberg said that she is still sticking to her $500,000 forecast for the crypto.

Bitcoin inventor Satoshi Nakamoto created the cryptocurrency to save the world from the way the central banks and governments manipulate the paper money system.

As William Quinn and John D Turner write in Boom and Bust—A Global History of Financial Bubbles: “To its advocates, bitcoin was the money of the future: it could not be devalued through inflation by a central bank, you could spend it on anything without having to worry about government interference or taxes, and it cut out the middleman, namely commercial banks.”

Proponents of bitcoin believe it shares most of the features of a store of value like gold. The number of units is finite, the network is decentralized enough to offer security to holders, and it can be used to hold and transfer value.

Vivek Kaul, author of Easy Money trilogy and one of the staunchest skeptics of crypto writes, bitcoin is at the level of a very very very very expensive large cap stock and its volatility is that of a small cap penny stock.

“So, if you do invest in bitcoin, do understand that you are taking a punt, you are speculating, you are hoping that the price goes up and does not fall. Also, don’t go looking for fundamental reasons for investing in it.”

“Given that investing in bitcoin is equal to taking a punt, please don’t bet your life on it. As the old cliché goes, don’t put all your eggs in one basket,” he adds.

Referred to as 'India's Warren Buffet', Rakesh Jhunjhunwala has said quite often that he "will never buy bitcoin". "I think regulators should step in and ban bitcoin and should focus on the digital rupee.”

So there are very different and staunch opinions on bitcoin. One set believes it is the emerging global currency while another set believes it's a speculative asset and the bubble is likely to burst sooner rather than later.

Take your pick! If you believe in bitcoin then this fall presents a good time to buy the crypto. There are many digital platforms in India which help you buy and sell bitcoins. Here you can start with as low as Rs. 500.

What portion of your portfolio should be constituted by bitcoin? According to a study by Yale economist Aleh Tsyvinski bitcoin should occupy about 6% of every portfolio in order to achieve optimal construction. Even those who are strong bitcoin skeptics should maintain at least 4% allocation, said the study.

The study indicates that even the staunchest opponents of the cryptocurrency world are best off investing 1% of their assets in this space, if only for diversification purposes.

To sum up, one should keep in mind that while cryptocurrencies currently exhibit higher potential return than other asset types, investments are associated with a very high degree of volatility. So you should be prepared for the roller-coaster ride!

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