Bitcoin Decline Continues: Are We Nearing the End of the “Haircut”?

In the last 24 hours, Bitcoin dipped below US$3000–a low that it hasn’t seen since July. While the coin has since been hovering between US$3200 and US$3500, this is still quite a correction from its high last month of nearly US$5000.

What’s Fueling the Crash: Trouble for Bitcoin in China

The massive “slippening” of the crypto markets comes on the heels of an announcement that China is forcibly shutting down Chinese Bitcoin exchanges (at least for now). While the ban will likely not be permanent, Chinese Bitcoin users have been “dumping” their coins en masse before the shutdowns occur. 

The Chinese government has instructed that the shutdowns must be completed by September 20, and must publicly announce their individual closure schedules today (September 15). In all likelihood, Bitcoin and crypto markets at large will experience some deep fluctuations and a sustained hit to the total market cap for some time.

While the price of a single Bitcoin has bounced back a bit from the lowest point of the latest dip, it’s unclear if Bitcoin will continue to decline, or if this is the end of the latest round of damage. The price will likely continue its decline at least until September 20th, when Chinese Bitcoin exchanges are required to have completed the process of shutting down.

Should You Hold Onto Your Coins?

There is a long tradition of Bitcoin holders turning to the Bitcoin reddit thread in times of trouble to share their woes and to look at memes that bear the following three words “just hodl it”. That’s right, “hodl”, not “hold”.

The phrase emerged from a Bitcoin Talk forum in 2013 entitled “I AM HODLING” in which user GameKyuubi rants about not being a so-called “smart-trader”. GameKyuubi said that because he feels that he is a “bad trader”, he is going to hold onto his coins through the dip to avoid losing money. The terminology has since been adopted by the crypto community at large.

“Hodling” is a strategy that may save you from yourself. Inexperienced traders tend to react emotionally to the wild swings of Bitcoin and other cryptocurrencies–they feel elated at its highs and they panic at its lows. Practically, this has the effect of “buying high and selling low”–that is, when things are going well in the crypto market, investors buy in at the higher prices, and then “panic-sell” when the price takes a dip (before it has a chance to recover).

The truth is that Bitcoin has taken severe, sustained hits in the past. In June of 2011, baby Bitcoin shot all the way up to a whopping US$32 a token. By November of that year, it had bottomed out at US$2, a 94% decrease. It wouldn’t recover until the next year.

Then, in November of 2013, the coin peeked its head over the US$1000 mark for the first time. By January of 2014, it fell back all the way back down to around US$200. Bitcoin didn’t reach above US$1000 again until January of 2017–nearly three years later.

Three years is a long time in the world of cryptocurrency. The people that bought in at one of Bitcoin’s peaks–like the ~US$32 in June 2011–and then sold at US$2 suffered huge losses. But the people who bought in at US$32 and “hodl’d” onto their coins through the dip have now made massive profits–imagine what would have happened if they had sold at the US$2 bottom (as many probably did).

There are bubbles within the cryptocurrency market (just as there are in any market), but cryptocurrency itself is not a bubble. There are people who make their entire living off of day-trading Bitcoin and other cryptocurrencies, but the majority of Bitcoin investors are amateur enthusiasts who lack the technical know-how to successfully day-trade.

Therefore, most people should not treat crypto as a quick way to make a lot of money, despite how volatile its day-to-day value can be. Accordingly, decisions about selling Bitcoin as it’s (rapidly) losing its value should not be made rashly, tempting as it may be.

So, should you hodl onto your coins? That’s a decision that you have to make for yourself. Hopefully, if you put your money into Bitcoin, you put it in as a long-term investment.