Bitcoin could fall 80%, if history’s any guide

$US30,000 is a key test point for Bitcoin. Picture: AFP

Bitcoin’s recent tumble, in which it lost more than half its value, took it briefly below $US30,000.

Bitcoin has been tumbling for more than three months now, and the move started to intensify in June. The cryptocurrency, which reached an all-time high of $US63,237 in mid-April, fell as much as 24 per cent in a five-day stretch ending this week.

For the year bitcoin is now up about 10 per cent, with the most recent price somewhere close to $US34,000 ($45,000) and some signs of its holding around the important $US30,000 level,

A decline below $US30,000 is a dangerous sign, according to market technicians. That’s where bitcoin found support in January before quickly racing to its record high. The $US30,000 level is also particularly important, as Barron’s recently noted, since if it breaks, bitcoin has a lot more room to drop.

The question is how much. “[If] for any reason bitcoin’s critical $US30,000 support were breached, it would be vulnerable to decline back to $US20,000,” The Institutional View’s Andrew Addison wrote back in May.

Meanwhile, Instinet’s Frank Cappelleri notes that the 61.8 per cent retracement of the entire 2020-21 move – an important level when using Fibonacci sequences to determine support and resistance – is near $US27,200. (With little in the way of historical records, bitcoin traders often rely heavily on trading charts and other forms of technical analysis. A Fibonacci sequence is a method of mathematical analysis for determining support and resistance levels on markets, such as the key prices, from which bitcoin might then make major moves upwards or downwards.)

In other words, if bitcoin can hold $US30,000, it would be good news for crypto bulls. Alternatively, it’s look out below!

The most recent bout of selling came as news broke that China will prohibit financial institutions from transactions relating to cryptocurrencies.

China has already moved on bitcoin ‘‘miners’’. This week it ordered its major banks and payments operators such as Alipay not to provide services related to cryptocurrency transactions.

In the US, the Treasury Department said it would like to require businesses to report crypto transfers of at least $US10,000 to the Internal Revenue Service in an effort to crack down on tax evasion. (This move is part of a wider regulation effort to prevent cryptocurrencies undermining anti-money laundering laws).

Still, bitcoin’s recent pullback is far from its worst sell-off. The cryptocurrency’s average pullback from a high is 48 per cent, according to Bespoke Investment Group data.

If the price of the world’s most important cryptocurrency falls to $US25,000, the price could then sink to $US6000, according to ICAP, an almost 80 per cent drop. That might seem extreme, but history suggests it’s realistic.

BARRON’S

This is an edited version of recent bitcoin coverage in Barron’s.