This article is not written to scare any investor from getting into crypto. In fact, if anything, it will help you prepare for a moment where selling makes most sense, in order to buy back at lower levels. Before delving in it is important to understand that each scenario is backed by either direct announcements or extensive research that points towards each scenario being a viable option that could trigger a bear market. For that reason we suggest doing more research in each option to develop your own conviction.
Aside from the above, keep in mind that you don’t need to be directly exposed to Bitcoin. You can also bet on its future price using derivatives products. For crypto, the most diverse selection can be found on Bitlevex, which is also great for beginners in the derivatives space. That said, let’s delve in.
Scenario 1 – US banning access to exchanges
Crypto Twitter likes to rant about countries being “unable to ban Bitcoin, only exclude themselves from the network”. Theoretically, this is true. However, keep in mind that the majority of new investors don’t understand how this would work. For them, the only option of buying crypto is through FIAT onramps, commonly known as exchanges.
We have already seen desperate efforts from countries like Nigeria and India to impose a ban on crypto, only to see P2P trading explode in popularity shortly after. In their efforts to prevent the collapse of their ever-inflating currencies, they will resort to public fear in order to change the investors’ sentiment.
The same is true with the US at the moment. The lockdowns and economic measures to combat COVID-19 have resulted in unprecedented inflation for the currency. In a 6-month period, consumers can see the price of goods increase 30-50% with salaries barely following the trend. Your money buys you less.
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Naturally, people turn to Bitcoin as a result – the only provably scarce asset that appreciates rapidly in value. As more and more people exit the banking system, dollars continue to lose their grip on the public. Given enough time (and enough price growth in BTCs price) we could eventually see a ban on Bitcoin, similar to the ban imposed on gold back in 1934. In such a case, a massive price drop in BTCs value would only be natural, as everyone would rush to sell their holdings.
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Scenario 2 – MtGox users finally receive their BTC
Back in 2014, MtGox went bust, taking with it all the Bitcoin of their users. The coins have remained in the possession of a trusted third party as legal proceedings continue to unfold nearly 7 years later.
A few weeks back, the trustee in charge of the protection and distribution of the funds announced that a decision has been made to return funds to their rightful owners. More specifically, users of the now extinct platform can get 90% of their funds (in BTC value) back into their wallets for them to use as they please.
The total of 141,686 Bitcoin (valued at more than $10 billion) will be sent to its nearly 20.000 owners on a date that is not yet specified. However, it is important to track the news of this story carefully, as the date of compensation could lead to a huge surge of selling pressure. This, in turn, could mark the beginning of the next bear market.
On a personal note, I believe this news could also simply lead to a short-term correction if we see institutional buying pressure increase over the next few months. Microstrategy alone holds nearly the amount MtGox creditors will receive. Aside from that, the funds may be given back with some sort of selling cliff, meaning that users can only sell small amounts of their holdings over a multi-year period to avoid market volatility.
Scenario 3 – Collapse of the USD
More and more people fear the eventual collapse of the USD which could happen sooner rather than later. With the huge amount of debt piled onto the current financial system, it’s only natural that the USDs survival is not realistic.
When this happens we will see the price of cryptocurrencies temporarily go blank, as every currency is tied with the value of the USD as well. Then, depending on the situation, we will probably see cryptocurrencies get their price valuation in a different, digital FIAT currency, or precious metals (e.g. BTC/Gold ounce). This shift in measurement could lead to more fear from the public, which could eventually lead to bearish market sentiment. However, we don’t expect such a situation to last long, as the chaos that would follow such a situation would be catastrophic for the global economy.
As we close this article remember that these are simply three scenarios of the many possibilities. Fear caused by higher altcoin dominance, as well as increased leverage in the market are also scenarios you should look into as you continue your research.