Bitcoin Is Down 12% From Its August Record. Will It Continue to Fall?

Key Points

• A flash crash in August triggered Bitcoin's sell off.

• The world's largest cryptocurrency has not yet rebounded.

• After Federal Reserve Chair Jerome Powell hinted at a September rate cut, many might have thought Bitcoin and other cryptos would rise.

• 10 stocks we like better than Bitcoin ›

Bitcoin (CRYPTO: BTC), the world's largest cryptocurrency with a market cap of more than $2.3 trillion, has gone on a big run during the past year, up more than 90%. But lately, the rally has stalled and Bitcoin is down almost 12% from its August peak (as of Sept. 2).

It's a bit odd when you consider that Bitcoin has historically responded positively to falling interest rates. Federal Reserve Chair Jerome Powell recently indicated that the Fed is considering easing monetary policy, leading the market to price in a strong likelihood of an interest rate cut at the Fed's September meeting. Will Bitcoin rebound or continue to fall?

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Crypto is unpredictable

Since Donald Trump's presidential election win in November, Bitcoin has performed extremely well, even while other cryptocurrencies struggled or stalled amid other challenges.

Image source: Getty Images.

The Trump administration has pushed deregulation in the crypto sector, installed pro-crypto advisors and cabinet heads, and even announced plans to launch a U.S. Strategic Bitcoin Reserve. The green light on the regulatory front has led many institutional investors and mainstream financial institutions to put more capital into the sector, with few concerns about regulatory pushback.

One might have thought that Powell's indication to the market that the Fed is open to a rate cut in September would boost the sector more. But recently, Bitcoin experienced a flash crash after a Bitcoin whale, an investor holding a large amount of coins, suddenly sold 24,000 bitcoins that were worth $2.7 billion at the time of the sale.

Since then, Bitcoin has floundered from more than $124,000 per token to about $111,000. It's not uncommon for recoveries to follow flash crashes, but this dip has lasted a little longer than investors might have thought. It's quite possible that other whales got nervous and are now selling to book profits after what has been an incredibly strong run.

It's also possible that crypto investors are nervous the Fed won't actually cut interest rates at its September meeting, or that other future rate cuts won't come to fruition. While it seems likely, there is still economic data that will come out before the Fed's September meeting that could influence its actions. A solid jobs report and higher-than-expected inflation data could push the market and even the Fed to reconsider a September cut.

Investors should also keep in mind that Bitcoin is only about 15 years old and there is likely a lot the market doesn't know about the digital asset. Crypto is often unpredictable and therefore trades in an unpredictable fashion.

Will Bitcoin continue to fall?

What happens in the near term is anyone's guess. Whales could continue selling. If economic data prevents the Fed from cutting rates in September or changes the market's expectations for rate cuts in the future, then Bitcoin and the rest of the crypto market could get hit hard. Rising interest rates tend to boost the strength of the U.S. dollar, which has historically traded inversely to crypto.

But long term, I expect Bitcoin to rebound and eventually move higher. Whether it turns out to be true, a significant portion of the market believes Bitcoin, with its finite supply of 21 million coins, is akin to digital gold and therefore a hedge against inflation. Trump has signed an executive order making it easier for investors to add Bitcoin to their retirement portfolios, and BlackRock, the world's largest asset manager, has even said that investors should feel OK allocating a small portion of capital in a multi-asset portfolio to Bitcoin.

Bitcoin has experienced several huge declines in the past, only to rebound and reach new highs. I see no reason that won't happen again.

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Bram Berkowitz has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.