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New players are hopping on the Bitcoin bandwagon, but the price of the digital asset has been wavering. Now, theres evidence that the momentum that helped it shoot above $40,000 earlier this month is losing steam.

Bitcoin has fallen about 9% over the past 24 hours to a recent $31,700, and more than 24% since peaking at $41,962.36 on Jan. 7. The price seems to be showing vulnerability after a great month, and could start sliding toward $20,000 if it cant hold the $30,000 level, predicted Oanda analyst Craig Erlam.

The drop has continued even as important financial players warm up to cryptocurrencies. BlackRock (ticker: BLK), the worlds largest asset manager, for instance, is allowing two of its funds to invest in Bitcoin futures, according to prospectuses filed on Wednesday with the Securities and Exchange Commission.

And Sequoia, a Virginia software and engineering firm, is giving employees the option to be paid in Bitcoin. (This could create tax headaches for employees who actually want to spend their paychecks, given that after already paying income taxes, they would have to pay more taxes based on any changes in Bitcoins value.)

Neither of these positive announcements appear to have boosted the price of Bitcoin. As always, its difficult to pinpoint exactly why the digital asset is moving. Janet Yellen, the nominee for Treasury Secretary in the Biden administration, did mention the risks of crime and fraud that Bitcoin poses in a hearing, but the selling pressure didnt really coincide with her comments.

The stock market can also move in confounding ways, falling on seemingly good news and vice versa. But this kind of wild unexplained swing is much more common in Bitcoin, which still trades largely on lightly regulated exchanges or on fast-moving overseas futures markets.

In recent weeks, Bitcoin has generally been weaker when its daytime in Asia, and stronger when its daytime in the United States. That reflects a divide in enthusiasm in those two parts of the worldboth critical to Bitcoin prices.

Bitcoin may be an international asset, but it trades differently and faces different regulations depending on the jurisdiction, so changes in local sentiment can affect prices even if the broader market is optimistic.

Theres been big net inflows into North America from Eastern Asia, said Philip Gradwell, the chief economist at Chainalysis, a firm that has mapped the Bitcoin ecosystem around the world and can track movements of cryptocurrencies in real time.

To understand Bitcoin, its necessary to grasp the differences in local sentiment, which can mean that American Bitcoin-holders wake up 10% poorer than they were when they went to sleep.

The North American ecosystem around cryptocurrencies has matured enormously compared to 2017, and also cryptocurrencies got a bit harder to use in East Asia, Gradwell said. Theres still a lot of cryptocurrency that is held by Chinese nationals, but theres a bit more pressure on the exchanges that tend to serve them. Technically, theyre still not allowed to operate on the mainland. They do, but theres sort of been a bit more of a clampdown. Also, youve had less interest from Japan and South Korea than you did back in 2017. People who bought Bitcoin then have been willing to sell it.

So even if Asian investors are bullish on Bitcoin, they have incentives to sell if theyre nervous about their ability to cash out in the face of more stringent government rules.

Gradwell says that Bitcoins 600% rise in 2020 had a lot to do with supply and demand. Large investors bought an enormous amount of Bitcoin between March and June, with a record numbers of buys worth at least $1 million84% more than was bought during the bull run in 2017. Some of those investors say they bought Bitcoin because theyre growing more nervous about inflation in the U.S., given that the government has been spending so much on stimulus efforts.

The supply of Bitcoin is limited, with only 6.25 new Bitcoinor about $200,000 worth at current pricescreated about every 10 minutes. So when large investors enter the market they need to find willing sellers, and may have to pay up for the privilege of buying it.

Theoretically, steadily rising demand would simply keep pushing the price higher given the limits on supply. But Bitcoin is a momentum trade that can turn around in a hurry. When the price starts to dip, theres often a rush for the exits, because sellers fear thatas in 2017they wont be able to sell at these prices for a while.

The thing that is interesting is like, when the demand suddenly eases off, there is always a rush to sell, Gradwell said. Because people go, OK, I dont know when the price is going to return to this level.

He says theres some evidence that recent Bitcoin holders are becoming more willing to sell in the past couple of weeks. In literally the last week or so, the number of Bitcoin that were moving that have been held for less than a month but made 25% or more dollar gains has reached quite high levels. So theres a lot of people that acquired Bitcoin recently, theyve done very well from the price increase, and they are starting to move it. And when they move it, that tends to be to sell. That starts to put some pressure on.

Traders may be starting to stress out about just how much Bitcoin has been driven by hype and FOMOthe fear of missing out. Bank of America released a global survey this week showing clients believe Bitcoin is now the most crowded trade in the marketeven more so than tech stocks.

These technical and sentiment issues can make it difficult to trade Bitcoin based on the day-to-day news in the sector. Momentum, market dynamics, and regional changes often explain things better.

Its one of the markets where actually the technical analysis traders actually do quite well, which economists like me get a bit upset about, Gradwell said. So I try not to explain those big price swings. I actually do think there is a genuine mechanism in the demand and the supply and its kind of as simple as that.

Write to Avi Salzman at avi.salzman@barrons.com

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Bitcoin Gets Crushed as Holders Worry Theyll Never See These Prices Again - Barron's