Bitcoin Braces for Heightened Volatility with a Potential Drawdown of 35% to 70%
Since 2023, Bitcoin has been in an accumulation phase marked by a steady rise, low volatility and corrections of up to 20%. Now, the crypto has transitioned into the growth phase, as indicated by the Stock-to-Flow model. What does this shift entail?
In the current bull cycle’s accumulation phase, the maximum drawdown didn’t surpass 22%. However, entering the growth phase historically results in corrections ranging from 36% to 71% before prices surge to new highs.
The upcoming halving serves as a potential trigger for such a drawdown. Pressure is expected from both miners, facing a halving of revenues, and whales looking to unload reserves amid significant news.
A similar scenario unfolded during the approval of spot ETFs when Bitcoin, instead of experiencing the anticipated rise from the news, declined by 18%.
Complicating matters is that 75% of Bitcoin investments over the past two months have been via spot ETFs, boasting an impressive net inflow of $7.3 billion into these crypto funds as of March 1.
The challenges with ETFs arise from two key aspects:
1. Newcomers to the crypto market, gaining access through ETFs, are actively buying in fear of missing out on gains. However, they may hastily exit when Bitcoin undergoes a major correction.
2. When investors start selling stocks, funds must sell Bitcoin on a crypto exchange for an equivalent amount, potentially triggering a chain reaction as large sales drive the price down further.
JPMorgan predicts Bitcoin could fall to $42k after the halving, representing a decline of over 30% from the current price. If the high is updated to $70k, the decline could reach 40%.
Despite these potential setbacks, Bitcoin is expected to maintain a long-term uptrend, evident in the accompanying chart.
While major corrections are inevitable and natural for Bitcoin, it is uncertain whether they will occur immediately after the halving. Preparedness for sharp negative fluctuations during the growth phase is crucial, even with positive factors such as spot ETF approval and issuance halving.
Cryptocurrencies involve complexity and carry a high risk of rapid monetary loss due to volatility and changing regulatory landscape. It’s crucial to ensure you understand how cryptocurrencies operate and can withstand the potential high-risk scenario of losing your assets.
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