A correction after the steep 6-month rally was neither unexpected nor unhealthy, and the magnitude of the correction was very much in line with bitcoin’s past track record. However, five negative news items hitting the market within a short space of time, stalling every recovery, was quite unprecedented even by crypto market standards. So, what exactly happened, and has this put an end to the bull market?
The May Crash — “It started with profit taking”
Bitcoin was already down around -16% from its all time high of $64,800 on April 14 to $54,000 by May 13 as investors had started locking in some of the profits they had made or rotated some of their bitcoin investments into other tokens.
“Then a string of negative narratives followed”
The first crash was triggered by a tweet from Elon Musk, condemning bitcoin’s high energy consumption. As Tesla’s $1.5bn bitcoin purchase in February, and their announcement that they would accept bitcoin as a means of payment were significant in furthering the institutional confidence in bitcoin, a seeming change of heart was taken as a possible signal that the strong institutional flows into bitcoin might stall. However, the idea that Elon Musk just realised that bitcoin had high energy consumption is absurd as it was known for years. Also, the timing of the tweet was rather odd as it closely followed announcements by several large institutional investors to enter the crypto market and offer cryptocurrency to their clients. These firms reconfirmed their commitment to enter the crypto market after the crash, and it is rather fortunate for them that they and their clients will be entering the market at much lower levels than they would have done not long before. As the market started to bounce back, more bad news kept pushing prices lower. China announced a ban on bitcoin mining, and later announced that financial institutions would no longer be facilitating trades involving Bitcoin. The US announced more stringent oversight over the taxation of cryptocurrency transactions. Elon Musk contributed with a further cryptic tweet that seemed to indicate Tesla would be selling their bitcoin holdings — which he later backtracked on.
“Liquidation of leveraged positions finished the job”
As had been the case during most previous crypto market rallies, a lot of leverage had built up in the system. The open interest on crypto derivatives exchanges was soaring during the rally, and exchanges that allow high leverage (even 100x or 125x) had seen large volumes. Once the narratives triggered a down move, automatic liquidations due to margin calls did the rest.
However, when liquidations exaggerate the market moves without strong organic selling interest, the market usually rebounds.
“The narratives spooked the market and triggered waves of sell off — but how much do they matter?”
The narratives about bitcoin’s environmental impact were cancelled out shortly after, as Elon Musk and Michael Saylor formed a Bitcoin Mining Council to promote “sustainable bitcoin mining”.
The positive framing even addressed the Chinese mining ban — which was of little consequence for bitcoin as crypto mining simply moves elsewhere, and the excessive concentration in China was in any case less than ideal — suggesting that basing a lot of the mining in the US rather than in China will be “much better for the environment”. Meanwhile several large institutions confirmed their continued commitment to enter the crypto market which is likely to lead to further significant inflows into the market over the medium term. The regulatory bans on crypto trading would be worrying if they concerned major Western economies, but China’s crypto trading ban is not new news (introduced in June 2019), only the greater level of enforcement is. Crypto related regulation in Western countries, even if it involves greater enforcement of taxes, is mostly positive for the market because it reassures institutional investors, making it more likely that they enter the market in size.
Source: coinmarketcap.com ; cointelegraph.com ; forbes.com ; home.treasury.gov
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