Bitcoin has had a turbulent history since its inception back in 2009, but no more so than in the first five months of 2021.
The daddy of cryptocurrency seemed unstoppable, hitting an all-time high (ATH) of around £45,000 in April.
But in May, thanks to a perfect storm of negative publicity, it went into freefall and crashed back down to around £23,500 at the time of writing.
It was a bloodbath across the board. Ethereum, Litecoin, Bitcoin Cash and Cardano, along with nearly every other altcoin recorded double-digit losses.
Despite this incredible short-term volatility, the price of Bitcoin has still shown explosive growth over the longer term – a key strategy for successful investing.
For example, if you had bought Bitcoin at the beginning of 2020 and sold at the end of the year you would have made a 300% profit.
Similarly, if you’d bought back at the peak in April, you’d been starting down the barrels of a near 50% loss, as you can see below:
Why has Bitcoin crashed and will it go up again?
Some of the reasons for the crash are:
Elon Musk. In March 2021 he announced that Tesla had bought US$1.5 billion worth of Bitcoin and would allow customers to pay in the cryptocurrency. The price of the coin soared.
In May, he changed his mind and said the firm would no longer accept the coin because of the reliance on fossil-fuel produced electricity for the mining process.
He did say that Tesla wouldn’t be selling any of his Bitcoins. He also reaffirmed his commitment do memecoin Doge several times.
China. The country doubled down on statements first made three years ago which called for tighter regulation on cryptocurrency and the mining process. Further regulation was also tabled.
The vast majority of crypto mining is carried out in the country because of cheap, mainly fossil fuel-based electricity.
FUD (Fear, Uncertainty and Doubt). Sellers panicked and started selling. It’s believed mostly retail investors reacted in this way, with many reports suggesting Bitcoin whales were scooping up cheap coins as a result.
Leveraged positions. Because of this FUD and the tumbling price, thousands of leveraged positions were automatically liquidated.
Can Bitcoin become a mainstream asset class?
This stormy period will be raising many questions about cryptocurrency as an mainstream asset class.
It’s always been considered an extremely high-risk investment, with many commentators convinced that anyone who dips their toes into the market will lose all their cash.
However, there’s no denying the explosion of institutional interest in Bitcoin and other cryptocurrencies over the past year. You’ll find an equally vocal group of financial experts expounding its virtues as a must-have in any portfolio.
For example, PayPal recently launched a cryptocurrency facility for its US customers, enabling them to buy, sell and hold coins on its platform. Plans to role this out to other countries, including the UK, are in the pipeline.
Software giant MicroStrategy has gradually been growing its Bitcoin portfolio and reportedly holds some US$1.5 billion worth. Even more recently, global investment bank Goldman Sachs said it now considered Bitcoin to be an investable asset – a marked U-turn on its position just a year earlier.
These are just a couple of examples. There have been numerous reports of respected global financial institutions either adding crypto to their portfolios or considering doing so.
Additionally, it’s never been easier for retail investors (you and I) to get in on the game and grab some coins through the major trading platforms, such as Coinbase. Check out our Coinbase review >>
What will happen to the price of Bitcoin? Will it go up or down?
The question now is what happens next? Will the price of Bitcoin continue to fall, or will it go back up again and post even greater ATHs?
Certainly, there are some wild predictions about its future price. Depending on where you look, you can hear figures varying from anywhere between US$75,000 and US$500,000 being banded around.
True Bitcoin believers will tell you that the coin’s volatility is to be expected in this brave new world of digital finance, while others will suck their teeth and tell you they knew all along that crypto was a speculative bubble waiting to burst.
The answer is that probably no-one really knows where the price of Bitcoin will be in a year’s time, or even next month.
Certainly the blockchain technology that underpins Bitcoin and other cryptos has demonstrated a strong use case in many areas and is here to stay.
Should I buy the dip and grab a bargain, or will I lose my money?
So, should you buy while the price is low (compared to this year’s ATH anyway) and potentially grab yourself a bargain?
Before you make the decision you need to assess your appetite for risk – something any financial adviser will do before suggesting where your money should be invested.
Key questions to consider:
- Do you understand what you’re investing in and the technology underpinning it?
- Could you live with losing your entire investment (or potentially making incredible returns)?
- Can you weather the extreme volatility of the crypto market (and not dump your coins at the first sign of trouble)?
- Can you accept that your cryptoassets will not be covered by the Financial Services Compensation Scheme?
Check out our guide to the top five crypto exchanges available to UK residents.
Assess your appetite for risk and do your due diligence
Like any investment you should do your own due diligence, assess your appetite for risk and accept that you need to view it as a long-term commitment.
Some people do make some quick money trading the extreme highs and lows of crypto but trying to time the market is a dangerous game to play if you don’t know what you’re doing.
The price of Bitcoin and other cryptocurrencies can turn on a sixpence as we’ve seen over the past few weeks.
Often, all it takes is a couple of headline-grabbing stories – good or bad – to shift the price dramatically and either improve investor sentiment and drive the price to the moon, or trash it overnight.
Crypto is moving to the mainstream
Crypto has always had a bit of an image problem due to its intangible nature, its association with nefarious activities and the fact that it doesn’t exist in any physical form.
But in recent years this has started to change with Bitcoin and altcoins becoming far more mainstream. Whether this is set back by the recent upheaval remains to be seen.
Some people will always view new things with suspicion. When paper money first came into circulation many people refused to accept it as they viewed it as worthless. It was only after time that fiat currency became a trusted form of payment.
Like blockchain technology, it seems highly likely that digital currency, in one form or another, is here to stay.
So if, having read this, you are still considering buying Bitcoin or any other crypto, ensure that you make your decision with your eyes wide open and never invest more than you can afford to lose.
It’s also important to diversify. If you do add some crypto to your portfolio, ensure that you have a spread of other investments covering different asset classes to keep its balanced.
Should I hold the Bitcoin I have in my portfolio or sell now?
If you already hold crypto you’re probably kicking yourself that you didn’t sell at the recent ATH.
You’re also likely to be understandably nervous given the dramatic drop in price and the negative news reports that are coming out daily.
Despite the glut of negative news and price drop, historically Bitcoin and other coins have proved resilient and bounced back up. Remember though that past performance is never a guarantee of future investment returns.
*This article is for informational purposes only and does not constitute financial or investment advice.
Adam is the founder of The Crypto Adviser which offers experts guides and reviews on all things related to Bitcoin and cryptocurrency.
Adam is Diploma for Financial Advisers (DipFA) Level 4 qualified, a Member of the London Institute of Banking and Finance (MLIBF), and has worked for many years as a journalist and PR consultant, having studied with the National Council for the Training of Journalists (NCTJ).