Bitcoin’s dramatic price collapse of 50 percent in a single day is something that not many people have witnessed, or something that has affected so many investors in the digital currency so hard. The price of the world’s most popular cryptocurrency started collapsing from well above $7,000 to hit a low of $3,000 — all this occurred over a few hours.

There is still no direct catalysing reason that can be attributed to why this collapse started, but what has become clear is that the Bitcoin space is paying the price for chasing after institutional interest and big enterprise money. Bitcoin was never intended to be a store of value, let alone an asset that Wall Street would consider investing in, but its mainstream push has seen it become unduly correlated to traditional markets.

The Covid-19 fear that is gripping the traditional markets has greatly affected investor confidence. However, this has now spilt over to Bitcoin which, despite being touted as a potential safe haven asset, has shown its true colours as another asset that braver traditional investors look to.

More so, the introduction and attempt to attract institutional investors to the market has aligned the asset with products that are traditionally seen in institutional markets, such as futures trading, and leverage and margin trading.

Reasons for the collapse

According to Naeem Aslam, Chief Market Analyst at Avatrade, the issue at hand in this latest collapse is indeed down to the increase in institutional investors over the past few years.

“One needs to understand that Bitcoin’s adoption has become somewhat better among institutional investors over the last few years—it was already highly popular among retail investors. The evidence of this was seen when large and much-established institutions started to offer not only the exposure to this asset but also the custody,” Aslam said in an investor note.

“So, when the bubble busted in the equity markets, the leverage position of institutional and retail investors changed substantially and in order to save themselves from a margin call, they had to sell those assets where they made profits.”

“This is the main reason that we have seen the massive sell-off in Bitcoin’s price and also in the gold price as well. The intriguing fact is that we have seen this episode before as well. During the financial crisis, when the global equity markets started to sell at current magnitude, investors used their profit from gold positions in order to save themselves from margin calls.”

Wait for the dust to settle

For Aslam, this may not even be the bottom, and he sees a price of $2,630 as a possibility — but, in the long run, he believes it is just about waiting for the market panic to settle.

“For now, the maximum plunge that I see is the low of August 2016 which is at $2,630. As for the upside, we just need to sit out and wait for the dust to settle. What I mean by that is that Dow Jones needs to act normal,” he added.

“Over 1000 points daily drop is abnormal. Once we see some of the panic fading away and market participants focus on actual fundamentals, bitcoin’s price could easily start to act as a safe haven asset once again. Coronavirus influence isn’t going to go away overnight, we are going to continue to see the effect of this in the coming quarter which should keep the safe-haven assets such as gold and bitcoin in demand.”

