Bitcoin Bounces Off of $90,000. What’s Next?

Bitcoin is in the financial headlines again, but not in a good way. Still, if negative sentiment is your go-to contrarian indicator, then today could be a great day to buy cryptocurrency.

Some traders consider Bitcoin to be a reliable gauge of risk-on or risk-off mood in the financial markets. When investors are feeling confident, the U.S. dollar tends to lag and Bitcoin often rallies.

What’s putting some people in a risk-off mood is the mainstream media’s narrative that the Federal Reserve might not cut interest rates in December. Just a month ago, practically everyone agreed that a December rate cut of at least 25 basis points was in the cards.

Now, the odds makers see the probability as being close to fifty-fifty. Hawkish talk from Federal Reserve Chairman Jerome Powell and a handful of Fed officials have cast a shadow of uncertainty about a December interest rate reduction.

At the same time, some market participants have express concerns about a bubble in artificial intelligence (AI) technology stock valuations. This, along with worries about over-concentration in a few mega-cap tech stocks like NVIDIA and Microsoft, have stoked fears that have bled into the crypto market.

Courtesy: Bloomberg, Yahoo Finance

The multi-year price trend for Bitcoin is still to the upside, but the media tends to focus on recent developments. After multiple months of inflows into Bitcoin as well as Bitcoin ETFs, sentiment rapidly shifted against cryptocurrency on and after October 10.

Much has been made of Bitcoin lagging behind stocks and Treasury bonds this year so far, especially after the Bitcoin price fell to around $90,000 recently. Surely, this has been a letdown for investors expecting a swift cryptocurrency rally in the year following President Donald Trump’s re-election.

That’s not how the financial markets work, however. When practically everyone assumes an outcome and piles into one side of a trade, typically the good news has already been priced in and a digestion/consolidation period may be in store.

It’s been a tough lesson to learn for anyone who over-invested in Bitcoin during the past few months. Earlier this week, Bitcoin hit its lowest price in seven months and $1.2 trillion of total crypto market value was wiped out in six weeks’ time.

Now, Bitcoin enthusiasts are searching high and low for signs of an imminent Bitcoin recovery. You won’t likely get any encouragement from Powell, who declared in October that “a further reduction in the policy rate at the December meeting is not a foregone conclusion — far from it.”

Courtesy: Jim Bianco

In a case like this, you can obsess over price charts but this can lead your emotions astray. It’s scary-looking when an asset’s price declines quickly, and you might end up selling when you ought to consider buying.

Perhaps some newcomers to cryptocurrency simply don’t realize how volatile it can be. For context, since 2017 Bitcoin has had over 10 price declines of 25% or more, six declines of 50% or more, and three declines of 75% or more.

To put it another way, the current Bitcoin price pullback is normal and probably necessary. Without price corrections, Bitcoin truly would be a bubble that’s susceptible to a total wipeout.

To quote Jean-David Pequignot, chief commercial officer at Deribit, “[E]xtreme setups like this have rewarded the bold in crypto’s past.” Fortune favors the bold, though it’s difficult to be gold when the media is distracting you from seeing the big picture for Bitcoin.

And that big picture involves relentless global government money printing while Bitcoin’s total supply is fixed at 21 million BTC. With that in mind, you know the end game and hopefully won’t get shaken out of a perfectly valid investment thesis over occasional but healthy Bitcoin price drawdowns.