What To Do About The Bitcoin Drop
Bitcoin has dropped about 20% since July, when it was just under $32,000 a coin. But with the price now trading closer to $25,000, you might be asking yourself what to do. So here are three things to consider about the bitcoin drop.
First, A closer look at bitcoin’s technicals
Let’s break down bitcoin’s weekly chart. Each bar you see represents one week’s worth of price action. By looking at it this way, we can get a clearer view of bitcoin’s longer-term trend – minus the daily distractions.
Chart 1: Bitcoin 20-week SMA
This chart shows that bitcoin is now below its 20-week simple moving average (SMA, yellow line). This is a constantly updating or “moving” average of bitcoin’s price over the past 20 weeks. It’s been a simple yet powerful tool to gauge bitcoin’s general direction:
- When bitcoin’s above the 20-week SMA and it’s sloping up: That’s usually a good sign. It means bitcoin’s been on an uptrend, and buying the dips could’ve worked out well.
- When bitcoin’s below the 20-week SMA and it’s sloping down: That’s often a sign to be more cautious. Bitcoin’s usually in a downtrend here, so buying can be riskier.
Right now bitcoin is below its 20-week SMA, which is sloping down. Of course, this doesn’t mean bitcoin has to drop more from here. But waiting for it to rise above the SMA might be a safer play – if history is anything to go by.
So keep an eye on that yellow line!
Chart 2: Bitcoin’s Bollinger Bands
You’ll notice on the next chart that the Bollinger bands are wrapped extremely close around bitcoin right now. That means bitcoin’s volatility is extremely low. And given the price has ranged between about $25,000 and $32,000 since April, this comes as no shocking revelation!
Side note: If you’re unfamiliar with Bollinger Bands or want a deeper dive into how they work, check out this more detailed post on Bollinger Bands.
You’ll also notice the green line underneath the chart – the Bollinger band Width indicator. The lower that green line goes, the lower bitcoin’s volatility.
Now, this indicator had a reading of around 0.2 for most of August. That’s the lowest it’s ever been. But if you look closely, you can see that this line is slowly starting to tick up. In other words, bitcoin’s volatility is expanding from its lowest reading ever.
Typically, the lower the volatility, the bigger the move you can expect when volatility finally returns. This suggests bitcoin is gearing up for a big move going into the end of this year.
As for the direction of that move – like I said, keep watching that 20-week moving average for clues.
Second, a bitcoin ETF is just around the corner.
Bitcoin’s technicals aren’t overly bullish right now. But newswise, there’s good reason to be optimistic. Bloomberg intelligence analysts give a 75% chance of the US Securities and Exchange Commission (SEC) approving a spot bitcoin ETF by the end of this year.
Unlike a futures ETF, a spot ETF (exchange traded fund) directly holds the asset it tracks. So when investors buy shares in a bitcoin spot ETF, that ETF provider has to buy bitcoin to match those shares one for one.
There are a few big institutions in the running to launch the first bitcoin spot ETF in the US. One of those is BlackRock – the world’s biggest investment firm with around $9.4 trillion of assets under its management.
A BlackRock ETF would be a final stamp of approval for institutional investors to buy bitcoin.
Third, the next bitcoin halving is just over six months away.
Last but not least, there’s the fourth bitcoin halving, which is expected sometime in April next year. It’s when the number of new coins miners earn per bitcoin block is cut in half. In this case, their mining rewards will drop from 6.5 to 3.25 coins per block.
In other words, halvings decrease the speed at which new bitcoins are minted, making bitcoin a scarcer digital commodity for miners to get their hands on.
Side note: You can read all about how bitcoin mining works in our investor’s guide to bitcoin.
If past halvings are anything to go by, you can expect bitcoin’s price to only really get going after the bitcoin halving. But if you check out those green boxes in the chart below, you can also see that the price trended up during the six months before the halving in two out of the last three times (halving 1 and 2).
So what should you do about the bitcoin drop?
As always, this depends on your time horizon and style of investing. If you’re a technical trader, look to the 20-week SMA for confirmation of a “safer” buying opportunity. If bitcoin can close a weekly candle above it, and hold it as support, history suggests good upside is in the cards.
For investors looking to “buy as much bitcoin as they can” before the halving, it makes sense to gradually buy in over the coming months. In that case, you’d view any big drops as major opportunities to bring your average entry price down.
And as any OG crypto investor knows, sentiment can turn on a dime.
The usual disclaimer: none of this is investment advice. It’s just my opinion. In case you’re wondering, I’m in the “buy as much bitcoin as I can” camp right now.