Will Bitcoin Rebound Soon? History Says No

Bitcoin is on its fourth major dip in seven years.

Bitcoin (BTC) has had a rough start to the year. After reaching a high of over $68,000 in November, the price fell by over 50% to a low of just over $33,000 around the end of January. Since then, it's pushed above $40,000 a few times but struggled to break the $45,000 mark.

The question on the minds of many investors: Will Bitcoin rebound and reclaim its November high anytime soon? Some analysts believe it will, and that it could then go even higher. Others are less optimistic. Recent analysis from digital asset firm BitOoda suggests Bitcoin will continue to struggle in the short term.

Why Bitcoin may struggle

BitOoda analyzed the correlation between Bitcoin and the stock market, and concluded that Bitcoin tends to suffer longer and deeper lows than equities. According to the research, Bitcoin is now in its fourth major low since 2014 -- that's the fourth dip of almost 50% or more from its high. In contrast, BitOoda identified two short-lived bear markets in equities on the Nasdaq and the S&P 500. It says these equities have only dipped by more than 10% a handful of times in the same period.

According to the BitOoda report, "BTC drawdowns are deep and prolonged." It points out that there are only rare occasions in the past seven years where the granddaddy of crypto has been within 20% of its all-time highs. This pattern does not bode well for those hoping Bitcoin will recover quickly.

Moreover, analysis of Bitcoin’s daily performance and the Nasdaq since the start of 2020 shows there's a strong correlation between the two when times are bad. If tech stocks are falling, Bitcoin is very likely to also perform badly. However, that correlation doesn't necessarily extend to when the Nasdaq is doing well -- Bitcoin may or may not mirror the Nasdaq's good days.

It's difficult to draw correlations with Bitcoin

Cryptocurrency is a relatively new and untested asset class. That's one reason it's so volatile. It's also why it's difficult to identify trends -- we only have a limited amount of data to look at. In an effort to make sense of crypto's performance and even predict what might happen next, people compare it with more established assets that have longer track records, such as equities or gold.

This can produce valuable insights, such as the BitOoda report. However, it isn't the be-all and end-all because crypto is a different asset class. Bitcoin's performance may have similarities with tech stocks right now, but we don't know whether that correlation will continue in the long term. A lot depends on how Bitcoin evolves and how other crypto-specific factors unfold.

Bear in mind there are several different narratives around crypto. To some extent, these mirror the technical comparisons people make. For example, one narrative is that Bitcoin is a form of digital gold, a safe-haven asset that could provide a hedge against inflation in the future. This makes the comparison with the price of gold interesting as it gives us an idea of whether this narrative might hold water.

Another potential narrative is that blockchain is the technology of the future, and Bitcoin could transform the way we handle money. If this is the reason you bought Bitcoin, it could be useful to look at the degree to which Bitcoin's price follows tech stocks. But those correlations only go so far because there are both similarities and differences. Let's say we see governments introduce heavy controls on crypto trading next week or a top crypto exchange gets hacked. Both would be unlikely to have much effect on tech stocks, but would have a huge impact on crypto prices.

What this means for investors

Market slumps are difficult. Crypto investors who've seen the value of their portfolios drop dramatically may be eager for prices to rebound. But given today's levels of geopolitical and economic uncertainty, that may not happen quickly.

What's important is your long-term outlook and whether you believe Bitcoin will eventually reach new highs. If you invest with a five- to 10-year perspective, it doesn't matter so much whether Bitcoin rebounds in the next three months or the next three years. If you only invest money you can afford to lose, you can wait out even a prolonged period of low prices. That's especially true if crypto represents a small percentage of your overall portfolio.