Bitcoin had a stellar 2017, rising over 1000% over the course of the year, and even being given the honour of having its very own futures contract on the Chicago Mercantile Exchange.
In the last months of 2017, it seemed that every day brought a new high in Bitcoin, along with a slew of newspaper articles discussing the pros and cons of jumping aboard the cryptocurrency train.
We even saw BTC being used as a medium of exchange, as well as an appreciating asset. The popular NetEnt Casino comparison site even showed that a few online casinos were starting to accept Bitcoin.
However, the start of 2018 hasn’t been so rosy for the world’s first cryptocurrency. By the middle of the month, the price of Bitcoin collapsed down to as low as $9000, testing the patience of many newcomers.
At the time of writing, Bitcoin is treading water around the $10,000 mark, and looks to have lost much of the momentum of last year.
In an even more worrying development, the volatility of Bitcoin, as well as the massive hikes in transaction fees, has led to some big brands such as the Steam store and Microsoft removing BTC as a payment option.
Does all this mean that the bubble has finally burst, and there will be no point in allocating funds to Bitcoin in future?
But then again, we have been here before.
In fact, Bitcoin has experienced this same kind of crash every January for the last 5 years, and each time, it has represented a massive buying opportunity, which has rewarded bottom pickers several times over.
So why does Bitcoin always crash in January?
Well the internet always loves a conspiracy theory, and as the self-styled home of the ‘Lunatic Fringe’, Godlike Productions is the obvious place to go to find out why this price pattern happens with such predictable regularity.
The crypto freaks on that site insist that the January dip always occurs 2 weeks before the start of the Chinese New Year.
With this year’s celebrations occurring on February 16th, the theory goes that we should wait until the start of February before we can see the real low, where we should buy with both hands.
But just how credible is this China theory?
It is true that China is a huge player in the crypto world.
For example, it is estimated that as much as 70% of the world’s cryptocurrency mining occurs in China. Each year, Bitcoin mining alone is estimated to use up to 4 gigawatts of electricity.
Put another way, this is equal to the amount of electricity produced by no less than 3 nuclear reactors.
On top of that, many wealthy Chinese use Bitcoin and other cryptocurrencies as a portable and anonymous store of money, allowing them freedom from government interference.
As the Chinese New Year approaches, the theory is that Bitcoin investors and miners cash in some of their virtual currency to go on a seasonal spending spree, leading to the January dip.
When these folks go back to work in late February, they slowly start to buy back into Bitcoin, resulting in major price rises later in the year.
And it’s certainly a neat theory, which does do a pretty good job of explaining the price action so far in 2018.
So, should you take this opportunity at the $10,000 level to jump into Bitcoin?
Well, maybe yes.
But then again, maybe not.
WHY IT MIGHT BE DIFFERENT THIS TIME
Repeating price patterns like the one we see the last 5 years on Bitcoin come to an end eventually.
And with so many new factors in 2018 for Bitcoin, this is as good a year as any for this price pattern to stop repeating itself.
For a start, traders and investment funds have that shiny new futures contract available to buy and sell Bitcoin, which they didn’t have in previous years, allowing big players to start influencing the price.
This winter, it won’t just be Chinese miners and investors who can dominate market action.
Secondly, there seems to be the start of tangible efforts from various governments to crack down on the trading and the mining of Bitcoin.
South Korea is the second biggest player in the world, and authorities there seem to be on the warpath to close rogue exchanges.
We saw in 2014 how the takedown of the Mt. Gox exchange by the Japanese depressed prices across the board for many months. Any repeat of that now might drive the price of Bitcoin down well into the spring, allowing for better buying opportunities later in the year.
Lastly, Bitcoin never seems to have convincingly solved the problem of exploding transaction fees, which have thwarted attempts to make BTC a viable means of exchange.
If we buy a $60 video games from Amazon, but we need to pay the supplier $20 just to use Bitcoin to make the deal, then this particular cryptocurrency will likely wither on the vine.
And the emergence of cheaper, faster and more flexible cryptocurrencies such as LiteCoin, Ethereum and Ripple, pose an existential risk to Bitcoin, as they are much more usable as a payment method, while still offering the same kind of anonymity.
So, should you buy Bitcoin with both hands on this price dip?
Will you be buying the bottom, or catching a falling knife?
While we are not financial advisors, we would suggest to
- Choose a more future-proof, yet established crypto alternative to Bitcoin
- Only allocate money you can afford to lose
- Open an account at a respectable broker such as Coinbase
- Get ready for a volatile, stomach-churning ride where you might lose everything
The crypto world is certainly exciting, with volatility on some days of 40%. If you can invest in this kind of challenging market, you can invest anywhere.
So, if you do decide to see if January 2018 will represent the buying opportunity of a lifetime, we urge you to only speculate with money you won’t feel bad about losing.