Crash, bubble burst. So what (cryptocurrencies)

It’s a “red Wednesday”, the price of bitcoin fell by almost 30% on Wednesday (19.05.2021). The last time BTC fell on such a scale was when China banned cryptocurrency trading in September 2017. The crash from that time seemed to end the existence of virtual currencies, and investors were called naive.

Red Wednesday (19.05.2021)

We seem to have Deja Vu, as China’s ban on all cryptocurrency transactions by companies and banks on Tuesday seems to be the nail that ended Bitcoin’s rally to $50,000 apiece. Undoubtedly, this is a replay of 2017 that seriously shook confidence in cryptocurrencies.

There was a warning sign of a crash

The expected crash was foreshadowed by a head and shoulders pattern. Somehow it was overlooked or events unfolded too quickly.

On Wednesday morning, most media outlets failed to notice that a head and shoulders pattern was being drawn on the stock charts of the Bitcoin exchange rate. The resolution of this pattern occurred within a few minutes of intense selling.

As we have mentioned in the past, a head and shoulders pattern is a chart pattern that appears as a base line with three peaks – the outer two are near the high and the middle is the highest. In technical analysis, a head and shoulders pattern describes a particular chart pattern that predicts a reversal of a bullish trend into a bearish one.

Analysts believe that the head and shoulders pattern is one of the most reliable trend reversal patterns and signals that an uptrend is nearing its end.

The bubble has burst and will burst many more times

No one likes to see others become rich, and when that happens, it affects the psyche of investors. That’s one of the reasons why investment bubbles form. It was the same in 2017 when the Bitcoin bubble burst and all the media announced that “it’s the end of cryptocurrencies”. And yes, there were a few months of silence and then digital gold slowly rose to reach peaks in 2021.

As predicts, the reason cryptocurrencies will survive is because people will use altcoins because the blockchain they operate will be part of their lives. Some examples of such applications are payment transfers, digital data transfer or storage, supply chain management, and managing large digital files.

So the investment thesis here is simple – cryptocurrencies will survive given their basic technological utility. Will they return to pre-crash prices? Many analysts say yes, but until that happens there will be many more ups and downs.

The causes of the crash, the bursting of the bubble

  1. One of the reasons for the crash and the bursting of the bubble was the statement by Chinese banks that supposedly “Virtual currencies should not be used in the market because they are not supported by real value.”
  2. In addition, Bitcoin continued its decline triggered by Elon Musk’s climate concerns over the mining process. For Tesla cars are powered by electricity generated from coal and gas, while Bitcoin mining is an energy-intensive process said to use more electricity per year than all of Argentina.
  3. JPMorgan stated that institutional investors appear to be moving away from Bitcoin and back to traditional gold. This indicated a reversal of the trend seen over the past six months. So, institutional investors fled from BTC when they saw the end of the previous uptrend of two quarters and thus sought stability.