Key Points
Bitcoin, down 40% from its all-time high, appears to be in recovery mode.
In previous market cycles, Bitcoin typically lost 77% or more of its value, suggesting it might still have further to fall.
If Bitcoin treasury companies are forced to sell their Bitcoin, it could set off a chain reaction of adverse financial events.
The growing consensus is that crypto winter is almost over. Bitcoin(CRYPTO: BTC), down nearly 40% over the past six months, is working its way back to the $80,000 price level. And the Crypto Fear & Greed Index, which measures overall sentiment in the crypto market, is at its highest reading in months.
But it could be too soon to celebrate. If history is any guide, crypto markets have further to fall. Here's the bear case for cryptocurrency that every investor should read.
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Historical evidence
Crypto typically moves in four-year cycles of boom and bust: three good years, followed by one bad year. Then the cycle repeats. During every period of "bust," Bitcoin investors typically get wiped out.
Bitcoin may be down 40% from its highs, but that's nowhere close to how far it has fallen in previous crypto market cycles. In fact, Cathie Wood of Ark Invest has tracked at least five different downturns of 77% or higher for Bitcoin. In one cycle, Bitcoin lost 94% of its value.
Image source: Getty Images.
Consider what happened in the previous crypto market cycle. In November 2021, Bitcoin hit a (then) all-time high of $69,000. From there, it proceeded to drop like a rock. Over the next 12 months, it lost 77% of its value, before bottoming out at the $16,000 price level.
What could send crypto even lower?
That's why I think Bitcoin may have further to fall this time around. Obviously, any re-igniting of tensions in the Middle East would send investors scurrying for cover. If they decide that Bitcoin is no longer "digital gold," they might decide to dump Bitcoin entirely, in favor of better stores of value. That could send the price of Bitcoin tumbling.
Moreover, this crypto winter has been unique in that there have been no major blow-ups, implosions, or financial casualties. Remember 2022? Crypto investment firms were going bankrupt, cryptocurrencies were falling to zero, and the FTX cryptocurrency exchange imploded.
Maybe this sounds overly pessimistic, but a similar type of event likely needs to happen this time around as well. Call it "creative destruction" if you'd like, but it's what is needed to start the next cycle of wealth accumulation.
My best hunch is that it will be the implosion of any overly leveraged Bitcoin treasury company that brings the whole system down. What happens, for example, if Strategy(NASDAQ: MSTR) starts selling some portion of its $60 billion in Bitcoin?
What do prediction markets think?
The data from online prediction markets is not very comforting. On Polymarket, for example, Bitcoin has the same chance (25%) of hitting $40,000 as it does of hitting $110,00. It has the same chance of hitting $30,000 (14%) as it does of hitting $130,000. And it has the same chance of hitting $20,000 (8%) as it does of hitting $160,000.
Bitcoin / U.S. dollar chart by TradingView
Before you decide to invest some of your hard-earned cash into crypto, take a careful look at Bitcoin's chart from 2022. Bitcoin did not go straight down, as there were plenty of fake-outs along the way as it sank to the $16,000 price level over a 12-month period. If history repeats -- or at least, rhymes -- then Bitcoin could be in for the same sort of bearish tumble this year as well.
Should you buy stock in Bitcoin right now?
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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
