Why is Bitcoin crashing right now?

This should be a time of strength for crypto: Inflation is at a 40-year high, which means fiat currency is losing its purchasing power at the fastest pace since the early 1980s. 

More importantly, since Bitcoin has a limited supply, why is it selling off even more than growth/tech stocks? 

If you’re a crypto investor, these are important questions… Below, I’ll offer some guidance to help you understand the violent selloff… and why you shouldn’t write off Bitcoin just yet.

If you’re a Bitcoin bull, you must accept the volatility 

Bitcoin bears point to the massive volatility as proof it’s not a currency or “store of value.”

In order to tackle this criticism, we need to understand why Bitcoin (and the entire crypto space) is volatile. 

First, it’s important to acknowledge that volatility is normal in the crypto space. As I explained in January, these corrections/crashes are nothing new for Bitcoin. Bitcoin is a relatively new asset (created in 2008)… and it’s gone through multiple boom-and-bust cycles in its short history.

For example, Bitcoin rallied from under $200 to over $1,000 near the end of 2013—a gain of 400%. But by mid-April 2014, it crashed more than 60% to under $400.

Then, in 2017, it rallied from under $1,000 to over $19,000 (a 1,800% gain) in one year… before crashing more than 80% to under $4,000 in December 2018. 

Each boom-and-bust cycle comes with different circumstances, but there’s one constant factor: leverage. 

How leverage affects the short-term price action in Bitcoin

Leverage is when traders use borrowed money to fund their trades. You’re probably familiar with how most brokerages will let you open a margin account. Brokerages are happy to let you use margin, since it’s essentially a loan they collect interest on. 

Put simply, it’s common for professional traders to use leverage across various markets. For example, if you have $5 and an exchange lets you borrow 10 times (10x) your money… you’ll have $55 in capital to buy an asset. So if you buy one share of a stock for $55 and it rises to $65, you just tripled your money (since you made a $10 profit while only putting up $5 of capital).

However, leverage works both ways: It amplifies gains and losses. In the example above, if the stock declines to $50, the exchange would force you to sell (via a margin call) and you’d take a 100% loss. (The $50 from selling the stock would go back to the exchange to pay back the loan… and your original $5 would be wiped out.)

Some crypto exchanges allow up to 100x leverage on your account balance. That’s insane, and can lead to massive price swings. When prices are rising, everything is great. Speculators can make huge profits while only risking a small amount of capital. But when markets move lower, it can trigger a slew of margin calls… creating a wave of selling pressure that can last a long time (until all the leverage is shaken out of the market). 

Any asset that moves like Bitcoin will attract speculators, as the big swings I noted above can lead to massive trading profits.

For more information on crypto margin trading, click here. 

That leads us to the biggest question…

Is Bitcoin really a store of value?

I believe it is—especially over the long term…

Remember, there will only ever be 21 million total Bitcoins… and over 19 million are already in circulation. Bitcoin’s limited supply gives it a critical, long-term advantage vs. paper money, which governments can (and will) print endlessly.

That’s why Bitcoin will hold its value long term. But on a day-to-day basis, Bitcoin’s price will be determined by the market. And the leverage in the market means we have to accept the fact it will go through big price swings over time. 

Another criticism I want to address is the fact that Bitcoin is much more volatile than gold. This is a fair criticism, since gold prices are essentially flat year-to-date (trading around $1,800 per ounce today).

Clearly, Bitcoin is much more volatile than gold. But that doesn’t mean it isn’t a currency or a store of value. You can use Bitcoin to purchase all kinds of items. And in a world where we’re all carrying smartphones, it’s far easier to send Bitcoin instead of gold as payment for goods or services.

Meanwhile, it’s getting easier for everyone to invest in Bitcoin. I’ve highlighted how Wall Street, city governments, and even entire countries are getting involved in Bitcoin. As more money and investors come into the space, prices should move much higher… 

Over time, I expect Bitcoin to rise to over $100,000, especially as it becomes integrated into our financial ecosystem and millions more start investing, speculating, and using it over time. 

Remember, it’s still a young asset class. The $100,000 level is only about 50% above its previous high of $67,000. 

It’s worth noting my target is conservative compared to others… including billionaire investor Peter Thiel, who called for Bitcoin to rise 100x in his speech at the annual Bitcoin conference in Miami last month.

In the short term, I’m watching the $25,000 level. If Bitcoin drops below that level, it means it’s following similar 80% crashes in prior years. That means the price could fall all the way to the $12,000 level (about 80% below its 2021 high of $67,000).

While I don’t expect Bitcoin to drop to $12,000… anything is possible in a free market where leveraged bets can force traders to sell at lower prices.

To compensate for this risk, investors should use small position sizes to help mitigate the volatility… and pay close attention to big money moving into crypto… such as by reading the stories I mentioned above. 

I’ll report back to you in a few weeks on the latest price action… and why recent moves like Fidelity allowing investors to add Bitcoin to their 401(k)s is a huge deal.

Daniel Creech is a Curzio Research analyst with over a decade of experience. He writes on macro trends, large- and small-cap stocks, and digital securities. He’s a regular contributor to Wall Street Unplugged, Curzio Crypto, Curzio Research Advisory, and The Dollar Stock Club.