Why price corrections are a sign of health in the crypto market
All tradable assets are bound to be affected by speculation from a great variety of investors and traders. In many cases, price movements are very.
All tradable assets are bound to be affected by speculation from a great variety of investors and traders. In many cases, price movements are very much apparent in an exchange market for assets like equities, bonds, futures, and of course, cryptocurrencies and even fiat currencies.
In a less liquid market, like real estate, there is no real-time price chart, but this does not mean that the property market is immune to speculation. So, speculation is a normal driver of the price of any exchange-traded assets.
In this week’s news, we would like to focus on why price corrections as a result of speculation is a positive sign that the free market works. We also think about what to expect during and after a price ‘crash’, like the Bitcoin flash crash on 19 May 2021.
More on Bitcoin: Read our complete guide on Bitcoin (BTC).
Price corrections offer the clearest view of the “reasonable value” of an asset
In any market, price does not equate to value. Price is driven by emotional sentiment, while value is derived from the ‘logic’ of the economy.
Now, we are fully aware that the economic sciences have a lot of models, whose principles rely on the assumption that human beings are economically reasonable agents. This may not be the case as human beings are emotional decision-makers.
However, economic models, like any subject of humanities, are still based on evidence of recurring behavioral patterns. On a larger scale, human behavior is actually consistent and predictable. Consistency is not exclusive to the natural sciences.
In fact, even the most robust theory in thermodynamics relies on estimates and assumptions, such as the definition of temperature, which is the average kinetic energy of all randomly moving particles in question.
From a grand scheme of things, everything will balance out. An undervalued asset will have a better valuation once its benefits are clear. Likewise, an overvalued asset will correct itself when the high price paid for it is not sustainable in the long-term.
Granted, this “reasonable value” for cryptocurrencies is less obvious compared to equities. With the latter, investors can use profitability indicators to gauge whether a stock is overvalued or undervalued. Cryptocurrencies, on the other hand, follow a similar valuation pattern to precious metals and even property.
Price corrections offer a better playing field for long-term investors
The year 2020 gave a timely reminder to many people who had forgotten that cryptocurrencies still exist in the market, even after the 2018 crypto crash.
At first, speculators were thrilled, and a sudden, unexpected surge in demand, particularly for an inelastically supplied asset class, sent many cryptocurrency prices “flying to the moon”. The early bidders would accumulate crypto assets while the prices were still undervalued.
This leads to the crypto assets becoming less distributed. Whales (i.e. people with a large quantity of assets) could flood the market in a single sell-off, potentially crashing the price. When prices are high, most astute investors would stay cautious of this potential event.
However, when price corrections do happen, there is a much larger supply of crypto assets in the market. They are ‘up for grabs’ for anyone who is brave enough to take the risk. Most retail investors would ‘wait and see’ for fear of further price corrections.
The great thing is that once prices consolidate (i.e. not moving much higher or lower over a period of time), there is a high chance that the asset has reached its new low after a period of time.
More importantly, the ownership distribution of the asset is ‘reset’, giving a playing chance for long-term investors looking to accumulate assets at their ‘fair price’.
Price corrections get people to think about what makes the asset valuable
It’s not uncommon for traders and investors to suffer from fear of missing out (FOMO), especially during the bull run in 2021. In this time, people were focusing on the price movement but possibly ignoring the underlying value of the crypto assets.
Fortunately, now that the bear market is happening, trades can slow down and people can finally reflect. Events such as the 2021 Bitcoin Convention, held in Miami last week, is a positive sign that Bitcoin enthusiasts are interested in learning more about it.
With more than 12,000 tickets sold, the convention guest-starred a few notable characters in the crypto space, including Twitter’s CEO and Bitcoin maximalist Jack Dorsey.
“If I were not at Square or Twitter, I’d be working on Bitcoin. If it needed more help than Square and Twitter, I would leave them for Bitcoin,”Twitter CEO, Jack Dorsey.
In Central America, a national-scale experiment is about to be conducted. In El Salvador, a country of 6.5 million people, President Nayib Bukele does more than embrace cryptocurrencies.
Bukele proposed to Congress to consider Bitcoin as legal tender of El Salvador, and a second official currency of the country after the US dollar. The president states that the cryptocurrency will generate jobs and help provide financial inclusion to those who had been excluded from the formal economy.
Referring to the large number of Salvadorans working abroad, Bukele said that Bitcoin can become a great solution to send money into the country from anywhere in the world. Bitcoin, he said, is “the fastest-growing way to transfer 6 billion dollars a year in remittances” (this accounts for 23% of El Salvador’s GDP).
Congress voted 62 out of 84 for the new law to accept Bitcoin as legal tender. Meanwhile, Brazil and Panama are considering following in the footsteps of El Salvador as the next countries to take Bitcoin to the next level in society.
On the other side of the world, Tanzanian President Samia Suluhu Hassan spoke to the Tanzanian Central Bank to begin research on how to quicken the adoption of cryptocurrencies by the country’s citizens.
Considering that Salvadorans will be able to pay taxes in Bitcoin for the first time in history, Bitcoin will have 6.5 million users who find the cryptocurrency essential, increasing the base intrinsic value of Bitcoin. In the coming months, if all goes well in El Salvador’s Congress, the price of Bitcoin may ‘correct’ upwards, to a new foundation of price.
If other countries follow a similar path, then a greater appreciation for Bitcoin is inevitable.
It’s not too late: Invest in Bitcoin (BTC) today.
Price corrections is a sign of health in the crypto market
In any healthy market, there has to be an increasing number of people who do more than just to speculate on the asset for the sake of it.
Price corrections and a steadily increasing long-term average price, both experienced by Bitcoin and some of the oldest altcoins, are a sign that the market is evolving from a purely speculative market to a market of value and utility.
We also see that cryptocurrency price corrections provide a few windows of opportunities for long-term investors. Additionally, they provide a cool-down time for the market to strengthen their confidence in the asset for the long term.
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated October 18, 2022