Major cryptocurrencies like bitcoin and ethereum have pulled back abruptly from the all-time highs they hit last month – but the jury is still out about where they could go next.
Despite seeing a brief surge in price over the weekend that took it back above $50,000, bitcoin has since slipped back, hovering at around $47,000 today.
That leaves it around 30 per cent below the record high of over $68,500 which it hit on 9 November.
Retreating: Bitcoin and ethereum are down 30% and 18% respectively from November peak
Ethereum has followed a similar trajectory, although the second most popular crypto seems to have weathered the storm better than its counterpart.
It has dropped by a smaller 20 per cent since hitting an all-time high of over $4,800 last month. Today, it is down by 2 per cent at around $3,800.
By contrast, dogecoin saw a sharp surge in price today after Elon Musk revealed that Tesla will accept the ‘meme’ coin as payment for some of its merchandise on a ‘test basis’.
What has caused the recent sharp fall in crypto prices?
Overall, 2021 has been a good year for cryptocurrencies, with bitcoin up by around 60 per cent in the year to date and ethereum by over 400 per cent.
However, the extent of recent declines has caught many investors off-guard.
According to Victoria Scholar, head of investment at interactive investor, the sell-off is down to a series of factors.
This includes the continued crackdown on crypto mining by China, as well as talks of some big bitcoin investors, called ‘whales’, selling their huge holdings.
‘There was also the sense that after a 135 per cent rally from July to November, hitting all-time highs, bitcoin was starting to look overbought and ripe for a pullback,’ she says.
‘One thing that’s for sure is that the crypto complex as a whole is a notoriously volatile asset class with the potential for wild swings in both directions.’
Bictoin price: The crypto has lost 30% of its value since hitting an all-time high on 6 November
Ethereum price: It has done better than bitcoin, but is still down 20% from November record
According to other analysts, the recent retreat is partly to be blamed on central banks’ talk of monetary policy tightening to keep rising inflation at bay.
Because cryptocurrencies are considered by some investors as a hedge against inflation, expected impending action from the likes of the US Federal Reserve and Bank of England to contain inflation may have dampened interest in them.
Richard Snow, an analyst at DailyFX, says: ‘Crypto markets, in general, have seen some phenomenal price appreciation due to its large appeal as a hedge against inflation.
‘While inflation persists, measure to combat it are being talked up more and more and major central banks, such as the Fed, have started to recognize the longer-term effects of persistent inflation.
‘Rates markets have stepped up their expectations of interest rate hikes into 2022 although, such expectations have proven to change – or self-correct – in response to central bank policy statements or evolving news surrounding the Omicron variant.
‘With much of the focus on controlling inflation, major crypto assets like bitcoin and ethereum have pulled back from recent highs.’
What next for bitcoin and ethereum?
As always, it is hard to predict the direction of these volatile cryptocurrencies.
Scholar believes that overall, the crypto market is in for long-term growth as the adoption of digital currencies continues to gain momentum and legitimacy.
In the shorter term, she believes investors are in for the usual series of bumps, and stresses that while some may be tempted to buy in the dip, they should remember the high risks associated with this volatile asset.
‘Bitcoin has been trading in a descending trendline since the peak in November with lower lows and lower highs, retracing around 75 per cent of its prior gain from the September trough,’ she says.
‘Having broken below key support turned resistance at $50,000, the next major support hurdle is at $43,5000 with a break below potentially paving the way for a move down towards $40,000.’
Ethereum has also staged a bearish breakout, pushing below key support at $4,000, with the next major hurdle on the downside at $3500.
‘However, compared with bitcoin, recent declines have been more contained, with ether retracing around 50 per cent of its declines since the September low,’ Scholar noted.
Craig Erlam, an analyst at Oanda, thinks the bitcoin price has stabilised in recent weeks and could be in for a end-of-year rally.
‘Bitcoin had a rough start to the week, and looks a little flat today as it continues to look for support around $47,000,’ he says.
‘It has seen support around these levels over the last couple of weeks, barring the flash crash 10 days ago, so this could be a key level for the cryptocurrency as it looks to find its groove again.
‘A dovish Fed could excite the crypto crowd, but that may be a lot to ask given the levels of inflation we’re seeing.’
But Snow is not so sure: ‘The largest cryptocurrency by market cap trades just below the psychological level of $50,000,’ he says.
‘Subsequent failed attempts at the $50,000 may be symptomatic of further future declines.’
However, he was more optimistic about ethereum.
‘While exhibiting a short-term directional move lower, Ether remains within the longer-term uptrend as the ascending trendline – acting as support – remains intact.
‘As long as this remains to be the case, Ether bulls may view bounce-off support as an opportunity to re-enter the longer-term uptrend’.