The latest news on Bitcoin must have a lot of investors scrambling for answers and hoping for the best. Nothing goes up in price forever, not Stocks, not Real Estate and obviously not the Cropto market. Corrections in any market are common and should be expected but almost a 42% decline in Bitcoin has a lot of people really nervous right now. And that 42% pull back is just in the US, for other markets it’s even worse, up to a 45% decline.
We get it, everybody is talking about the Bitcoin meltdown. But we have news for you: if your local currency is the USD — chances are high that it is if you are reading this — Bitcoin’s recent sell off is even worse than it appears. Before you panic, we’ll give you some perspective that will hopefully put you at ease, or scare you out of Bitcoin all together. Either way, we hope our research will help bring you out of your paralysis and push you to a conclusion.
On 12/16/2017, Bitcoin closed at a record high of 19,187 USD per Bitcoin. Since than, as of 1/25/2018, Bitcoin pulled back 41.9%.
However, BTC’s meltdown is even worse outside of the United States. In case you have not been paying attention, the USD has been weakening vs. major currencies. On January 24th, the The ICE U.S. Dollar Index, which measures the buck against a basket of six rival currencies, hit a 3 year low.
What this means is that although Bitcoin lost 41.9% of its value relative to the dollar, it has lost even more relative to other major currencies!
In other words, your crypto bros in Asia and Europe actually lost more than you did.
Now you might be wondering, “Wow, Bitcoin dropped over 40%! Who cares if it it is just a few points more! Look at the above price chart – the bubble is clearly bursting!”Before you panic, let’s put things in perspective. When judging the volatility of an asset class, we must consider the historical volatility of the asset class. For example, when the EUR appreciates 6% relative to the USD per my above chart, that is a big deal and makes the news. But when the stock market goes up or down by 6%, that’s just fluctuation. Now, if the stock market goes down 20%, that’s a correction. Similarly, we must judge Bitcoin’s meltdown relative to its history.
We don’t want to sugar coat the recent Bitcoin sell off — the current 42% pullback from its all-time high is still the worst we’ve seen since August 2016. But with some historical perspective, the current 42% pullback from its all-time-high really isn’t that unusual. In fact, it is the norm.
Using Bitcoin price data starting from February 2012, the below chart is BTC’s price relative to its all-time-high up until that point. For example, 0.0% points means the price of BTC hit a new all-time-high, and subsequent prices are measured against the new all-time-high).
If you think Bitcoin has been very volatile, consider this article a wake up call: the current pull back isn’t even a Bitcoin bear market, its the norm! If you are unable to handle this volatility, we recommend you do not invest in Bitcoin or any other crypto currencies. Do not invest more than what you can lose. But for those who are adventurous, patient, and prudent, we believe Bitcoin deserves a small allocation in your portfolio.
After all, in the data that we presented above, Bitcoin spent 9.1% of the the time making all-time highs!
Filed under: Currencies
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