Bitcoin's Thanksgiving plunge raises questions: Is the story of three years ago going to repeat itself?

As overseas markets entered the Thanksgiving holiday, Bitcoin staged a "thousand-dollar" plunge. On Thursday afternoon, Bitcoin continued to fall, falling below $16,500 per coin, a daily drop of nearly 12%, and a sharp drop of nearly $2,000 from the daily high; Ethereum fell below $500 per coin, a daily drop of 12.4%. The plunge in Bitcoin prices also caused a large number of leveraged traders to be liquidated. According to Coin data, in the past hour, traders who bought Bitcoin with borrowed funds had their positions liquidated for $367 million.

Bitcoin and other digital currencies have tumbled, sparking speculation about the durability of the cryptocurrency market boom.

Just last night, Bitcoin once stood at $19,500 per coin, setting a new high in nearly three years. This round of rebound has attracted all kinds of people, from Wall Street billionaires Paul Tudor Jones and Stanley Druckenmiller to momentum investors who hope to take advantage of rising assets and falling markets.

Analysts said profit-taking after recent gains and speculation about stricter government regulations were among the reasons for the drop in bitcoin prices.

Bitcoin researcher Vijay Boyapati pointed out that the $19,500-19,550 range is the last strong resistance range before Bitcoin hits a new all-time high, and the bears may take action. If Bitcoin fails to test the 19,500 area again in the short term, the price may pull back.

“Bitcoin is very overbought and needs to correct,” said Vijay Ayyar, head of business development at Luno, a Singapore-based cryptocurrency exchange. “So I don’t think it’s surprising to see a big drop, frankly.”

Skeptics say the cryptocurrency’s famous volatility could be a harbinger of what happened when the bubble burst three years ago, with some seeing signs of a frenzy among retail investors chasing a rapid rise as a way to set the stage for an inevitable crash.

Ryan Rabaglia, global head of trading at brokerage OSL in Hong Kong, said concerns about possible tightening of cryptocurrency rules in the United States and profit-taking could explain the price declines for most digital assets on Thursday.

“It is not uncommon to see a short-term pullback after a sharp acceleration in gains as traders seek to take profits and then readjust once volatility subsides,” he said. “Once the dust settles, it will return to normal and all the medium- to long-term bullish indicators are still in play.”

Bitcoin supporters say the attention on cryptocurrencies is different now than it was three years ago because of growing interest from institutional investors such as Fidelity Investments and JPMorgan Chase.

A crash may be inevitable

Many investors had expected this big drop. Justin d'Anethan, sales manager of Diginex, a cryptocurrency asset company, said that the trading volume in the Bitcoin spot market is very high now, and the same is true in leveraged markets such as contracts. If the spot price does not break through the previous high, a market correction is inevitable. Since October, Bitcoin has been rising all the way, soaring from $10,000 to $19,500, nearly doubling. It is only one step away from the historical peak of $19,783 at the end of 2017.

If calculated from the low point in March this year, the price of Bitcoin has nearly doubled this year.

As for why Bitcoin has risen sharply this year, the reasons behind it can be summarized as follows:

1. The depreciation of the US dollar. Since the outbreak of the epidemic, the unprecedented monetary easing measures of the Federal Reserve have weakened the US dollar. As a means to combat depreciation, Bitcoin has once again been sought after by the market. Compared with the traditional older generation of investors who love to invest in gold, the young millennials obviously prefer Bitcoin.

2. Increased acceptance by mainstream institutions. In August this year, Fidelity launched a Bitcoin index fund, which means that this alternative investment is gaining recognition from more and more mainstream investors. At the end of October, payment giant Paypal announced that it would allow users to trade and use cryptocurrencies, becoming the first mainstream payment platform to accept Bitcoin.

3. Production halved again. On May 17, 2020, Bitcoin experienced its third halving, which means a reduction in new supply. However, as demand is increasing at the same time, supply is gradually outstripping demand, pushing prices up.