In December, Bitcoin’s price reached a new ATH at around $ 19,800, but could not stay at this level for a long time, and rolled back to $18,000. For some time, the price of the main cryptocurrency dropped even below $ 18,000. Many investors were sure that after breaking the previous all-time high the price will continue to rise and break new records. But that didn’t happen. Let’s find out why this happened. Is it too late to buy bitcoin now?
Why investors expected growth
In 2017, after the price of the original cryptocurrency broke through another ATH at the level of $ 5,000, this phenomenon provoked a FOMO effect in the crypto market, and the price increased almost 4 times within two months to $ 19,400. But after that, a strong pullback happened, and the price fell below $ 10,000 in less than 2 months. Over the next three years, Bitcoin could not even get close to the 2017 high.
Now analysts have noted that the situation with Bitcoin is repeating itself. This means that after overcoming the last ATH, a new, possibly stronger FOMO effect may arise, as a result of which Bitcoin will go “to-the-moon” to conquer new peaks.
But contrary to the expectations of analysts and investors, this did not happen. Here are some reasons why Bitcoin pulled back and stagnated instead of starting a real bull rally.
Regular Correction
Look again at the chart above. What do you see? Although Bitcoin reached an incredible ATH, the chart shows that corrections have occurred along the way, and quite strong ones. This can be seen by analyzing the shadows of the candles (long lines on top of the rectangles). They indicate pullbacks. For example, when Bitcoin first crossed the $ 19,000 mark, the price plummeted below $ 16,000, but then the price rallied again and rose even above the previous high.
This is how the market works: the price cannot only rise or only fall. It all depends on the balance of supply and demand. When the price rises strongly, it means that many buyers have accumulated who want to get profits, and they start selling the asset. If at this time the number of new purchases is not less than or exceeds the number of sold assets, the price will remain or grow. If the assets of new buyers are not enough, the price will begin to fall.
FUD
Do not forget about the FUD effect: a fall in an asset can trigger a stronger fall. Those who invested in bitcoin at the peak of its value begin to panic, fearing a repeat of the situation in 2017, selling the cryptocurrency at a loss. In fact, even a small drop is enough to cause such an effect. The figure below illustrates this perfectly.
As you can see in the screenshot, a small fall is followed by a series of red candles. In six hours, the bitcoin rate fell by more than $ 600.
Short players have entered the game
Not only investors who are in for long-term profits trade in the market. Speculators seeking quick deals are out there too. They monitor the market situation and get into deals based on the likelihood of a positive event for them. As bitcoin surged above $ 18,000, futures funding rates at major exchanges like Binance turned negative.
This means that the number of open short trades to sell bitcoin has exceeded the number of long positions. In other words, the preponderance of forces was on the side of the bears. The phenomenon of negative futures financing rates is extremely rare in the crypto market and signals aggressive behavior of sellers.
However, the opposite effect may also occur if there are enough buyers. Then the positions of the shortists can be liquidated (the price continues to grow rapidly, as sellers’ deals are closed with losses).
And now we smoothly move on to such a phenomenon as a confrontation between longists and shortists on the crypto market.
Battles of whales
Movements of whales (major players) in the crypto market can provoke a whole trend, not to mention local rate fluctuations. This type confrontation has been going on since the very appearance of stock trading.
When long positions accumulate, it is profitable for shortists to liquidate them, since after that there will be little to hold back the decline in the exchange rate if the strength of buyers has practically dried up. In the cryptocurrency market, such situations often arise. They can be seen on the charts of Bitcoin and other cryptocurrencies. Here is one example:
Shortists “knock out” positions of longists.drops
On the five-minute chart, you can see that the price of cryptocurrency sharply dropped after many positions with high leverage were opened. If a trader opened a long position with a leverage of x100, the price only needs to drop by a few percent, depending on the amount of the collateral, for the position to be liquidated (the player’s collateral is completely gone).
However, the Longists can also carry out a counterattack to eliminate the positions of the shortists. This can also be seen on the graph. But in this battle, the bears still won.
How to protect yourself against a fall
Corrections are an integral part of the market because of their cyclical nature. But there are tools that allow you to insure your funds and control risks when investing in bitcoin. This can be achieved in several ways:
- Hedging;
- Diversification;
- Stop-Losses;
- Alternative instruments (inter-exchange arbitrage).
Hedging
The method works like so: a trader opens a position equal in amount but opposite in direction. For example, if you hold Bitcoin and are suspecting that the trend will change to a down-heading one and the price will fall, you can open a short position for the same amount. In this case, the loss on one of the transactions is offset by the profit on the other. Professional investors and hedge funds resort to hedging, which insures their assets if an uncertain situation arises in the market (that is, it is not clear in which direction the asset will move).
Diversification
Let us quote the law of conservation of energy and project it into the sphere of the financial world: money does not come from nowhere and does not disappear, but only flows from one market to another. This means that if some financial instruments become cheaper, others grow in value. Using this rule, you can distribute your assets between different types of instruments: cryptocurrencies, oil, gold, stocks and currencies. Of course, diversification does not always mean avoiding losses, but it will minimize them.
Stop Losses
If you are sensing a correction, you can transfer bitcoin to a crypto exchange so that you can quickly sell the cryptocurrency in the event of a rollback. In addition, you can place a pending sell stop order on the exchange. Thus, you determine the acceptable level of losses in advance .
For example, you believe that if Bitcoin falls below $ 18,000, then it will continue to fall. In this case, the trader sets a condition: if the price reaches $ 17,900, then place a sell order at $ 17,850. If the rate, as expected, drops below, you will experience a loss, and then you can re-enter the market at a lower price.
Alternative Tools
We have listed the main tools, but if you search for more, you will find alternative ways to minimize risks and losses.
One of these methods is the service HiRiBi. With the help of an exchanger, you can always sell bitcoin at a rate higher than the market average. This is achieved thanks to algorithms designed for protection against volatility of cryptocurrencies and providing access to international platforms, where the bitcoin rate can differ significantly. This allows HiRiBi users to offer the highest rate for selling bitcoin. For example, now with a bitcoin price of $ 19,290 you can exchange it for USD PayPal at the rate of $ 22,377 and get an additional $ 3,086 for 1 BTC.
How that works:
- Enter the amount of BTC or USD you want to sell Bitcoin for.
- Enter your PayPal account.
- Send coins and wait for the money to arrive in your PayPal account.
Funds will be sent automatically after 3 confirmations on the Bitcoin network. HiRiBi allows you to sell bitcoin at a higher price, even if the price has already rolled back. This way you will reduce losses or even get a small profit. You can also immediately sell bitcoin and then buy it cheaper on the crypto exchange in order to immediately get the profit and go to zero, even if the rate falls.
So what are you waiting for? Follow the white rabbit HiRiBi.
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