A crash is rarely a verdict on an asset’s future. Frequently enough, it isn’t even a verdict on much of anything other than how panicked some investors were at a specific period in time.
On that note, on Feb. 5, Bitcoin (CRYPTO: BTC) crashed by around 14% before recovering in the following days, and the broader crypto market shed enormous value in the same window. But does that mean Bitcoin’s tenure as the best cryptocurrency to buy is now definitively over, or is it just as appealing as ever for those who are patient?
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First, let’s unpack why Bitcoin fell so much, because there isn’t yet a cohesive narrative on the subject.
In short, this downswing appears to be more like a cascade of selling prompted by somewhat opaque financial actions rather than being the result of a Bitcoin-specific problem.
On Feb. 5, there was a mix of cross-asset selling pressure in crypto, and a few large liquidations in crypto derivatives markets, which happened around the same time as outflows from Bitcoin exchange-traded funds (ETFs). On that day alone, Bitcoin ETFs reported $297 million in capital outflows, on top of $635 million in outflows that happened on Feb. 4.
One plausible mechanism is that Bitcoin was serving as collateral for leveraged trading by a hedge fund or large capital holder somewhere in the financial system, and was then sold off when that player’s other positions went bad. That kind of forced selling can drag down even high-quality assets, and, in this case, it might have sparked a stampede out the door once the sell-off picked up speed, exacerbating the problem significantly.
But nothing changed about Bitcoin’s investment thesis with the crash, regardless of its cause.
Same as always, Bitcoin’s core advantage as an asset is that its new supply keeps shrinking on a fairly predictable schedule. No government can ever print more of it.
That thesis only pays off in the long run if enough investors keep choosing Bitcoin as a store of value. But the coin now has more on-ramps for capital (like the ETFs) than ever, and a larger base of long-term holders who have already lived through worse. The coin’s habit is to survive deep drawdowns and then recover.
The biggest long-term risk is the coin’s cryptography. Bitcoin transactions rely on digital signatures, and there’s a chance that in the next decade, sufficiently powerful quantum computers could eventually threaten the security of those signatures. Nonetheless, there are already discussions underway about shoring up the network’s defenses.