Crypto-currency experts believe the Bitcoin price will bounce back to last year's highs after the latest dramatic plunge.
This, after Bitcoin, the world's most valuable digital currency, hit a new 2018 low of $5 826 on Sunday. The latest price low means Bitcoin is now trading at less than a third of its 2017 peak, which saw the crypto-currency spike close to $20 000 in December.
At the time of publishing, Bitcoin was trading at $6 266.
Research by the Warwick Business School this year found crypto-currency prices are not influenced by any economic factors and instead are driven purely by the mood swing of investors.
The new research, studying the weekly trading patterns of 14 of the largest crypto-currencies, including Bitcoin, found no correlation with any economic indicators that investors would base decisions on or with commodities.
Explaining the drop
Commenting on the latest Bitcoin price drop, Richard de Sousa, partner at SA-based crypto-currency exchange, AltcoinTrader, says there are many reasons for the Bitcoin price falling.
One of these is that Mount Gox, an exchange that went bankrupt years ago, has been dumping a lot of coins on the market and selling them, he notes.
"The second reason is that there have been a lot of investors that got in when there was a media frenzy, in November and December of 2017, and as a result, are cutting their losses and getting out as they have seen a fall in their investments. They are concerned about how much their investment could fall, as it already has fallen by two-thirds, so a lot are cutting their losses."
According to De Sousa, there have also been institutional investments, which have been anticipated and expected by the crypto community, which hasn't actually come through. Institutional money hasn't flown into this space as yet, and because of the volatility and the dip since December, the institutional investors are sitting on side-lines waiting to see what will happen, he notes.
Nonetheless, he believes the Bitcoin price will reach the December 2017 prices again.
"It's just a matter of time. The market is overzealous and expected to reach those heights very soon. In reality, we can expect to only see those highs in 2019. This is a cyclical event; it has happened many times before and the last time it had a crash of this magnitude, it took 411 days to bounce back to its previous high. That is over a year. People are quick to forget historical data. I am very optimistic that it can definitely and certainly bounce back," De Sousa says.
He points out investors need to keep a clear perspective of the performance of Bitcoin.
"If we go back exactly one year to 26 June 2017, we find Bitcoin at $2 478; fast forward a year, Bitcoin is at $6 266, at today's price. That is a 252% increase from last year to this date. In that regard, Bitcoin is still performing very well. There is no other investment where you could have received an annual return of over 200%."
Hold on
Thus, he is of the view that with Bitcoin, investors need to invest only money they are willing to lose. "This means if there is a price drop, you are not heavily invested with all of your wealth. In that scenario, the obvious advice is to hold your coins, not to sell and buy back in, because it is only a matter of time before they will bounce back and go up in value. Invest in a wise way if you have dedicated some money to crypto-investments."
Daniele Bianchi, assistant professor at Warwick Business School, notes the Bitcoin pricing is entirely influenced by past returns and the hype and emotion of investors as they watch the price climb or drop.
"There is research showing limited similarities between Bitcoin and gold, but looking across the 14 biggest crypto-currencies, the high volatility of their price means they can hardly be seen as a reliable savings instrument in the short term, let alone the long or medium term," Bianchi says.
"These are not like normal currencies where a country's economy will influence the price. Instead, they share similarities to investing in an equity from a hi-tech firm. As a matter of fact, most of these crypto-currencies come into existence through unregulated crowd sales similar to IPOs, the so-called initial coin offering.
"As a result, the market for crypto-currencies may look similar to the dot.com bubble at the end of the 1990s, and it may be that only a handful of them survive, so for investors, it is like choosing who will be today's Amazon."
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