The latest crypto flash crash has even the most bullish of Bitcoin bulls asking, “Will crypto recover?” And it makes sense. In a matter of days, Bitcoin fell 10% in value. Ethereum got hit even worse. It’s down more than 15%. Even Solana – which we’ve been particularly bullish on – wasn’t able to escape the bloodbath. It’s down close to 19% in the past week… This despite the fact that it had shown a strong upwards trend while most other cryptos flatlined.
First off, those are pretty brutal numbers. Any time an asset drops double-digits in value, it makes sense that investors take notice. And unsurprisingly, lots of media outlets are once again preparing crypto’s obituary. But long-term crypto investors should be somewhat used to this by now… Even if it does hurt to take a glance at the portfolio.
However, the crypto markets have already recovered somewhat. At last check, the big boys like Bitcoin and Ethereum were up more than 3%. But there’s a good chance the bleeding isn’t over just yet. We’ll explain why.
What Caused the Big Sell-Off?
The crypto and stock markets most often operate independently of each other. That’s why using the same technical analysis on one doesn’t always apply to the other. That being said, when big events affect one, they can sometimes spill over to the other. And that was the case this past week.
The big news of course was that China Evergrande Group is teetering on the brink of collapse. And it would be no small deal when the second-largest property developer in the most populous country in the world defaulted on its $300 billion in debt. This would be especially troubling for China as its economy is purportedly slowing down.
If things go as poorly as possible, China could be facing something akin to the subprime mortgage crisis the U.S. faced in 2008. And if you recall, it wasn’t just a matter of predatory lending, banks collapsing and that $700 billion TARP program. That year also saw the largest market crash to date. A lot of people lost a lot of money. And the threat of something like this happening in China has investors a little skittish.
What we saw at the beginning of the week was a bunch of investors liquidating some of their more volatile assets. This hit the stock market hard. And it hit the crypto market even harder.
But that begs the question… Will crypto recover from this latest route? That part’s easy. Of course it will. But the bigger, more interesting question is when? Here’s where it gets a little trickier. But if you’re familiar with derivatives, this should be pretty easy.
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Will Crypto Recover? Not This Week
As mentioned above, we’ve already seen some incremental gains in the crypto markets. More likely than not, that’s just from retail investors buying the dip. But Friday, September 24 is a big day for Bitcoin. That’s because there are more than $3.4 billion of Bitcoin options expiring that day… One of the largest options expiries of the year. This is according to crypto analytics website, Skew.
For the uninitiated, Bitcoin options contracts allow investors to buy or sell crypto at a pre-specified price by a set date. And again, the big date is this Friday. This is expected to trigger a whole lot of volatility in the crypto markets. And it’s worth noting that there is more interest in calls than puts. This signals that most investors are bullish on Bitcoin. However, the price crashes earlier in the week are likely to mean that a lot of those call contracts will expire worthless. And that could sink Bitcoin’s price even lower than it’s been recently.
So, for investors looking to buy the real dip, it makes sense to see what prices do going into the weekend. We could see one of the best buying opportunities of the year over the weekend. That being said, if prices fall below the $40,000 mark, it could cause a further sell-off. So be patient. We might not see the end of these price dips for another week if negative sentiment catches on. But regardless, it will only be a matter of time before buyers can’t resist the discounted prices.
Will Crypto Recover? Here’s the Bottom Line
Back in the early days of crypto, it wasn’t impossible to imagine a scenario in which digital currencies quietly went away. But that’s simply not the case anymore. First off, the underlying blockchain technology is simply too valuable at this point to just go away.
Secondly, it’s not just a bunch of geeks keeping their eyes on crypto any more. Morgan Stanley (NYSE: MS) now offers its rich clients access to crypto. You can check out paying with crypto in your PayPal (Nasdaq: PYPL) account. Hedge funds are getting in on crypto. Heck, El Salvador has made Bitcoin its official currency – albeit with some hiccups. And it’s just a matter of time until the SEC gives in and greenlights the first Bitcoin ETF. And that’s when a whole lot more institutional money starts rolling in.
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For buy-and-hold investors, there’s really not a bad time to get in on the Bitcoin action… Or any of the major altcoins for that matter. They may not hit all-time highs next week – or even this year – but they will eventually. People asked, “Will crypto recover” ad nauseam in 2018. Those same folks that were digging its grave in 2019 never saw the great crypto rise of 2020 coming.
Crypto is here to stay… Mind you, not all crypto will stand the test of time. But the ones that have lasted through a crash or two and managed to climb back up are here to stay. And as adoption spreads, you can expect values to continue to rise for years to come… With some volatility thrown in for good measure, of course.
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