After Bitcoin hit its recent all-time high of over $ 40,000 earlier this year, the cryptocurrency saw some minor slumps. At one point, analysts expressed concern that if BTC doesn’t solidly recapture the $ 35,000 mark, it could potentially suffer further slumps.
Now these “more drops” seem to have arrived. Bitcoin fell to a three-week low of $ 28,800 at the start of the Asia session, before stabilizing around $ 32,000, according to Reuters. According to CoinMarketCap, the drop contributed to a 17.94% dive that occurred in the past seven days. This is the biggest weekly decline in BTC since September.
Bitcoin’s surge in recent months has been largely fueled by a narrative that includes several factors. First, this institutional cash is firmly anchored in the price of BTC. second, BTC is increasingly seen as a hedge against inflation; and third, that retail investors are smarter than in previous years (and therefore less likely to panic).
However, this recent decline might contradict that narrative somewhat. What made the price of Bitcoin drop and what’s next?
Has there been a successful double-spend attack on the Bitcoin network?
Doug Schwenk, chairman and managing director of Digital Assets Research (DAR), told Finance Magnates that the decline may in part contribute to a “discussion about possible double spending in Bitcoin.”
“This could be a sign of a serious security problem, but it seems like a routine that has been overrated,” Schwenk told Finance Magnates. “Still, the rumors are not reassuring for new entrants.”
What happened? A tweet posted by BitMEX on Jan. 20 said that “it looks like a small double overhead of around 0.00062063 BTC ($ 21) was detected,” the tweet said.
[1/2] There was a stale bitcoin block today at 666,833. SlushPool beat F2Pool in one race.
It seems like a small double overhead of around 0.00062063 BTC ($ 21) was noted. Http: //t.co/o8lz9xagYG pic.twitter.com/IEdPu8JEjt
– BitMEX Research (@BitMEXResearch) January 20, 2021
In response to the report, Kyle Rodda, an analyst at IG Markets in Melbourne, told Reuters, “While you don’t want to streamline too much in a market as inefficient and immature as Bitcoin, there is certainly a reversal swing.”
“The herd probably looked at this and thought it sounded scary and shocking and now it’s time to sell,” he added.
Regardless of whether or not the tweet caused this “reversal of momentum”, a number of cryptocurrency analysts have pointed out something pretty significant: the double spending actually did not materialize.
While two versions of the same transaction have been transmitted on the network, only one will ultimately be accepted.
Cryptocurrency trader and commenter Hasu stated in a blog post on Deribit, “Occasionally, two mining pools find a new block around the same time, and those blocks have the same accumulated difficulty.”
“Then some nodes go to one block and other nodes to the second block,” he continued. “The Bitcoin network is then forked for a short time. However, there is a chance the fork will be resolved once the next block is found. “
In other words, the Bitcoin network works in such a way that transactions are sometimes temporarily duplicated. However, this is usually corrected in a few minutes.
Indeed, Lucas Nuzzi, Product Manager for Network Data at CoinMetrics, stated in a series of tweets that while multiple versions of a single transaction were broadcast on the Bitcoin network with different fee amounts, “in the end ONLY 1 is accepted”.
10 The chain was split for 1 block (back to normal), but ultimately the miner in the branch won with the low-fee transaction.
It is important to know that there may be different versions of the same transaction, but in the end ONLY 1 will be accepted.
– Lucas Nuzzi (@LucasNuzzi) January 21, 2021
Nuzzi described the apparently great concern about BitMEX’s tweet as a “wake-up call for crypto media”.
“BitMEX Research is doing an excellent job for the community. Your portrayal of what happened was accurate. Unfortunately, their post for clickbait was grossly misrepresented, ”he said.
Will the New US Presidential Administration Affect BTC Markets?
While the BitMEX Research tweet and the media cycle that followed may have contributed to BTC’s price drop, analysts believe other factors play a role.
Schwenk pointed out to Finance Magnates that some of the expected regulatory behaviors from the Biden administration may also bring some rain to the Bitcoin parade.
“We have news of a crypto-savvy but perceived highly regulatory choice for the SEC, Gary Gensler, and negative comments from Janet Yellen in her audit hearing,” he said.
Mark Grabowski, Associate Professor at Adelphi University and author of Cryptocurrencies: An Introduction to Digital Money, said Finance Magnates that “future Treasury Secretary Janet Yellen’s negative comments on cryptocurrency” may have spooked Bitcoin markets.
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Yellen: Legislators should “restrict” the use of cryptocurrencies, as they are “mainly” used for illegal activities.
During her confirmation hearing on Tuesday January 20, Yellen suggested that lawmakers should “restrict” the use of cryptocurrencies as they believe they are “primarily” used for illegal activities.
“Cryptocurrencies are a particular concern. I think a lot of them are mostly used for illegal funding, at least in a transactional sense, ”she said. “… I think we really need to investigate how we can limit their use and make sure that money laundering does not take place through these channels.”
Yellen’s comments come just a week after ECB President Christine Lagarde that Bitcoin was used for “an utterly reprehensible money laundering activity.”
Grabowski said investors heard Yellen and may be taking her seriously: “Bitcoin has been down since then and the rest of the market follows,” he said.
Grabowski also pointed out that “rumors of South Korean government regulations” in crypto markets “sparked a major recession in early 2018 and the US is an even bigger crypto market”.
Hence, uncertainty about what the U.S. government might have in mind for crypto markets could add to Bitcoin’s dive.
“Government regulations may actually add to cryptocurrency in the long run, but they invariably harm the market in the short term,” said Grabowski, adding, “Perhaps most Republicans and Democrats in Congress agree that more cryptocurrency regulations are in place.” is needed.”
Market correction [Is] a natural BI product of the growth of cryptocurrencies. “
However, other analysts believe the recent decline is much less prescient than what may or may not be in store for the markets over the next four years.
Jack Williams, founder and CEO of B4U Financial, told Finance Magnates, “I think the loss in value is linked to profit-taking, as many bought Bitcoin at a much lower price and now want to reap the profits.”
“Now that the president’s drama is over, those who bought bitcoin as hedge are liquidating some of that inventory, and as the supply increases, the price will go down.”
“It’s not the lack of stability or usefulness of the other cryptocurrencies that is at stake here,” he said. “I expected a market correction as a natural by-product of the growth of cryptocurrencies.”
In addition, DAR’s Schwenk pointed out that “leverage is waning in some markets, taking profits and buying downside protection,” potentially contributing to Bitcoin’s decline.
Does BTC stand at $ 20,000?
But how deep could BTC go?
Schwenk referred to a recent statement by Guggenheim’s Scott Minerd who “is largely being followed by institutional buyers.” Guggenheim recently said that bitcoin has likely topped for the year and could go back to $ 20,000: “I think we’ve probably topped bitcoin for the next year or so for now. And we will likely see a full retracement towards 20,000. “
Finance Magnates previously reported that crypto community member O_V Crypto Alien has indicated that BTC could potentially drop to $ 23,500 to fill a CME gap created in December.
“CME gaps” are phenomena in which the Bitcoin markets suddenly move outside of the regular trading hours for CME’s Bitcoin futures markets. This creates a literal hole or void in the Bitcoin price charts. If this has happened in the past, it has often been observed that the Bitcoin price will eventually drop back to the level at which the gap formed. So the return fills the gap.
With the gap near the $ 23,500 zone, some analysts believe that Bitcoin is heading back towards $ 20,000 before a meaningful return to price levels above $ 40,000 is possible.
2017 all over again?
While market conditions are indeed very different than in 2017, some analysts have drawn parallels between BTC’s recent all-time high and the boom-and-bust cycle three years ago.
Bitcoin’s new all-time high of around $ 41,000 this year was hit on Sunday, January 10th. Twelve days later, on January 22nd, the price is approximately $ 31.5,000. This corresponds to a decrease of around 23 percent.
The all-time high Bitcoin hit in 2017 was hit on December 17th when it hit around 19,700. Twelve days later, on December 29, the price of Bitcoin had fallen to $ 14,880, a decrease of about 24 percent (only 1 percentage point difference).
After Bitcoin hit $ 19.7,000 in 2017, Bitcoin’s price didn’t bottom out until February 6, 2018 (51 days later) when it hit around $ 6050. This corresponds to a decrease of around 70 percent.
“It’s all happened.”
If history continues to repeat itself, Bitcoin won’t bottom until the first week of March this year, and if Bitcoin loses as much as it did in 2018, the price would drop to $ 12,300. While most analysts think this is highly unlikely, stranger things have happened.
Even if Bitcoin may not lose 70 percent of its value in the next few months, important market corrections in BTC are still a given.
Ben Perrin, moderator of BTC Sessions, told Finance Magnates: “During the 2017 bull market, Bitcoin saw several corrections of 38%.”
“A drop to as low as $ 25,000 would be possible – and perfectly normal for market conditions,” he said. “It remains to be seen whether BTC will see these kind of declines as shoppers turned mostly away from retail in the years leading up to the newfound institutional money in 2021.”
In other words, “This has all happened before … but many are just experiencing it for the first time.”
“To get a significant advantage in navigating the headlines, just look back through history.”