Sell? Buy? What the analysts say about the crypto market dip
Ouch. The pullback on Bitcoin and other cryptocurrencies stung the mainstream markets this week. But those who have survived some major crypto dips over the years are taking it all in stride.
“Supply [of bitcoin] is growing 2% a year and demand is growing faster. That’s all you really need to know, and that means it’s going higher,” said Bill Miller, chairman and CEO of Miller Value Partners in a CNBC interview this week. “It may not be a straight march to the upside, though, because with bitcoin, volatility is the price you pay for performance.”
So what exactly fueled this week’s drop in Bitcoin’s price, which sent the world’s first digital currency from a high of more than $64,000 on April 14 to its current trading price hovering at or below $50,000 US? What’s happened to the coin which recorded record-breaking gains of more than 60% since the start of the year? Analysts and investors are weighing in with different theories.
Many point to US President Joe Biden’s proposed tax increases. Biden announced on Tuesday his proposal to increase capital gains tax to 39.6% from 20% for those Americans earning more than $1 million.
“My take right now is that the Joe Biden tax has something to do with it. Sellers probably jammed the market, and bids disappeared,” said Constantin Kogan, partner at investment firm Wave Financial, to CoinDesk. “U.S. participants are just a portion of the market but probably the wealthiest, both corporate and retail.”
Both the crypto and US stock markets slid as the potential impact of the tax hikes sunk in.
“Sticker shock over some of these tax figures will be hard to shake off for some investors,” said Edward Moya senior market analyst at OANDA to USA Today. "Some traders are looking for an excuse to lock in profits and they might choose to use this tax story as their catalyst."
Others saw an upside to the Biden proposal. With a total market capitalization of more than $1.7 Trillion, there’s plenty of opportunity for investors to trade and build their portfolios within the digital currency system, said Ryan Selkis, CEO of Messari.
“But if you think about this capital gains issue, one of the unintended consequences might be that more capital’s locked in this crypto ecosystem long term and medium term,” said Messari to CNBC. “And ultimately, that’s going to be to the benefit of this entire new class of assets. They’re referred to as DeFi assets - essentially, being able to borrow against existing crypto holdings rather than sell them and trigger a taxable offense.”
Beyond the Biden news, some analysts pointed to another major factor in the digital currency dip: liquidation of assets held by individual traders, who are often called “retail traders.”
“At its core, bitcoin is still heavily driven by retail, who choose to use a lot of leverage,” said Rich Rosenblum, president of the crypto-trading firm GSR, in The Wall Street Journal's analysis of the selloff, pointing to Bitcoin’s drop of more than 17% in about 20 minutes on April 17, which was the first major wobble of the week.
Philip Gradwell, chief economist of Chainalysis, a crypto research firm pointed to three factors that impacted the weekend selloff.
“First, the liquidation of a record number of leveraged bets. Second, there had been a buildup of Bitcoin on exchanges, which is typical when people are waiting to see if the price will continue to rise or reverse. When it reversed these holders likely rapidly sold. Third, all of this happened in an illiquid weekend market that appeared to have relatively few buyers,” Gradwell said in a Bloomberg report.
A third factor that may be impacting the recent Bitcoin correction is its recent price plateau. The coin has tried and failed to top $60,000 US twice since the start of the year, which may be triggering a “decay in momentum” said Nikolaos Panitgirtzoglou, global market strategist at JPMorgan Chase & Co in a CNBC “Closing Bell” interview.
So is it time to sell? Buy?
“The crypto world is still confident with Bitcoin,” Moya said, and individual investors “will likely be buying on every major dip.”
Miller, of Miller Value Partners, agrees. “I don’t think this is a bubble at all in bitcoin, I think this is now the beginning of a mainstreaming of it.”
Joyce Pavia Hanson