A Reminder to Hodl: Bitcoin’s 68% Retracement Isn’t Unusual

Much has been written about bitcoin’s meteoric price collapse over the past six months. The decline has been so severe that many have questioned whether bitcoin’s long-term supporters (hodl’ers) have lost their resolve. However, a careful evaluation of bitcoin’s previous bear markets reveals that the latest retracement isn’t out of the ordinary.

The Support Level Every Trader Needs to Know

As Hacked reported Wednesday, the psychologically important $6,000 support level has been holding well despite the recent downturn. As it turns out, this level offers much more than just psychological significance: it represents a 70% correction from last December’s all-time high and, depending on who you ask, is roughly the break-even rate for miners.

According to Ben Marks, CEO of Blocktrade Capital, the nine previous bitcoin corrections had an average retracement of 64%. For corrections lasting longer than 50 days, the average reversal is 76%. Based on this analysis, $6,000 represents the midpoint of both time frames (as a refresher, bitcoin peaked above $19,700 in December).

For technical traders keeping close tabs on charting patterns, bitcoin’s 2018 correction is almost identical to the correction of 2014 when looking at three popular oscillators: RSI, MACD and Stochcastics. One can argue that the outlook for bitcoin in 2014 was far worse than it is today (Mt. Gox bankruptcy, fallout from Silk Road, poor crypto literacy among consumers, businesses and regulators). And yet, cryptocurrencies became one of the fastest-growing markets of all time just a few years later.

As Tom Lee has reminded us time and time again, virtually all of bitcoin’s yearly gains occur over the span of just ten days. Remove those days and BTC/USD is actually down 25% annually.

Market Psychology

Opponents of bitcoin like to argue that the cryptocurrency lacks “intrinsic value” while cleverly negating the massive amount of resources needed just to maintain the network. If mining rigs, computing power, human resources, crypto exchanges, wallets and thousands of start-ups do not represent “intrinsic value,” then we may have a problem with semantics.

Whether you call it intrinsic value or fundamentals, bitcoin is supporting a global marketplace that extends far beyond what traders do. In fact, “investment coins” now represent half of the total money supply in blockchain, down from 72% over the past year.

That being said, traders and other market participants have a vested interest in protecting their investment. Unless you are shorting bitcoin through the futures market, there is a large community of actors who are committed to keeping prices elevated – or, at least, stable. Going back to Marks, there’s strong reason to believe that market participants will spur to action to prevent bitcoin from falling below, say, $5,000. Those who argue that the market has no bottom and can theoretically fall to zero have clearly overlooked the sheer volume of positive developments occurring on multiple fronts: regulation, adoption, innovation and custodial services. (As an aside, I sometimes have to write multiple Crypto Roundups each week just to keep track of all the positive news.)

There’s no denying that market psychology toward cryptocurrency is brutal right now. However, consider this: bitcoin’s nearly 70% correction has occurred much faster than previous retracements. The recent correction has lasted roughly 200 days compared with 300 that followed the 2014 price collapse. Theoretically, this means that an upward correction could be accomplished much more expeditiously than the several years it took to catapult prices toward $20,000.

To wrap up this article, I’ll leave you with a paragraph I wrote on June 12 that sums up where we are in bitcoin world:

“There’s strong reason to believe that bitcoin’s recent downturn is here to stay for much longer than many had predicted. The good news is the cryptocurrency’s value proposition has only increased over the past six months thanks to institutional adoption, Lightning Network upgrades and continued growth of blockchain enterprise. In a market that is heavily influenced by sentiment, the facts will set you free.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi