More than $500 billion was wiped out of cryptocurrency gains made in the last few months when investors began selling off Bitcoin, Ethereum, and others, triggered by a couple of consecutive events globally. The virtual currency reclaimed its position, albeit, by and large, the outlook has turned bearish.
Bitcoin, the world’s largest cryptocurrency by market capitalization, fell by over 30% to as low as $32,304 by 9 AM ET on Tuesday before bouncing back later in the day.
Considering Bitcoin was hovering over $63,000 in mid-April, this plunge, like others before it, indicative of the highly volatile nature of the asset, is likely to deter new investors from getting into crypto. But as any cryptocurrency enthusiast would know, crypto is inherently volatile, which is exactly why it was able to gain so much momentum in just these preceding months.
Analysts had predicted a sharp decline late last year when Bitcoin had started gaining high traction. But its value truly skyrocketed after Tesla CEO Elon Musk added Bitcoin to the Tesla balance sheet. Musk even went on to declare that Tesla would accept Bitcoin as payment for its products and services, essentially giving the digital currency some sort of legitimacy in a digital world.
So what caused the spiral down to almost $31K?
Well, it’s hard to put a finger on any particular reason but let us assess the events at the start of this week.
China Bans Crypto Transactions
China, a country responsible for 75% of the world’s Bitcoin miningOpens a new window , on Monday outlawed crypto-related services in the country by all financial institutions and payment companies. “Recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,†stated three government-backed bodies in a statementOpens a new window .
Announced by the National Internet Finance Association of China, China Banking Association, and Payment and Clearing Association of China, all cryptocurrency exchanges and initial coin offerings (ICOs) were also banned, but individuals can still hold cryptocurrencies.
But holding crypto is no good if it can’t be used to price products or services or present the digital currencies as leverage for insurance coverage. The ban by China was the first, if not the only, trigger that initiated the plunge. Upon the announcement of the ban, Bitcoin fell more than 13% and, for the first time in 14 weeks, went below $40,000. This was around 1 AM ET.
This is not the first time that China moved against virtual currencies. The country’s regime in 2017 shut down the local crypto exchanges, and later in 2019, had hinted (or warned?) of banning ICOs. It finally did.
See Also: Bitcoin and U.S. Tech Stocks Could be the Biggest Market Bubbles
Musk’s Sway on Cryptocurrency
Tesla, headed by billionaire CEO Musk, wasn’t the first to announce the purchase of Bitcoin by any measure since Microstrategy and Square were already invested in it. What was significant about Tesla’s buy-in was that its $1.5 billion investment was over 10% of the Tesla cash holdings. The company even announced it is planning to accept payment in Bitcoin, which resulted in a 20% surge in Bitcoin value.
Things looked positive for some time (they still maybe), with Musk, billionaire investor Mark Cuban, the Winklevoss twins, and others backing the rally that began late last year. Tesla’s balance sheet even reflected a gain of $101 million ‘positive impact’Opens a new window from sales of digital assets world $272 million in Q1 2021 earnings.
So what changed?
Tesla’s entire business is based on products that help in conserving the environment. The company also profits from sales of environmental regulatory credits, which amounted to $518 million in sales, a 46% surge year-over-year. Tesla has profited from credit sales for six quarters in a row, but Q1 2021 (the seventh) was the first quarter where profits were supported by digital currency.
However, Bitcoin and other virtual currencies are energy-intensive. “Tesla has suspended vehicle purchases using Bitcoin,†said Musk in a tweet. “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at a great cost to the environment.â€
Musk’s retraction dented hopes of countless Bitcoin holders, who went berserk amidst panic-stricken offloading of the digital currency. The influence he wields over crypto enthusiasts is massive, but that’s just it, isn’t it? They’re enthusiasts, or maybe even short-term investors hoping to cash out at the first sign of turbulence.
Elon … you realize that 75% of miners use renewable energy, right?
This energy story has been debunked over and over again.
— Pomp 🌪 (@APompliano) May 12, 2021Opens a new window
Interestingly enough, JPMorgan Chase noticed an uptick into gold, a traditional form of value asset. The investment bank told Yahoo! FinanceOpens a new window , “What is striking is that the recent outflows from bitcoin funds have been accompanied by inflows into gold ETFs [exchange-traded funds] in a reversal of the last quarter of 2020 and the beginning of this year.â€
They add, “To us, this suggests that institutional investors appear to be shifting away from bitcoin and back into traditional gold reversing the trend of the previous two quarters.â€
But what if Musk swings back and backtracks on this retraction? Will those that got off the ship re-board? They probably will and on the cycle will continue.
Musk’s decisions since January 2021, combined with setbacks such as car crashes, etc., have shrunk Tesla’s market capitalization by nearly $300 billionOpens a new window .
Speculative Trading
Mining Bitcoin or any other cryptocurrency is one thing. However, people have started looking at it as an investment prospect, purely from a retail standpoint. It is even considered ‘digital gold’ by some, without realizing the underlying technology, blockchain.
It is essentially a distributed ledger that emerged in the wake of the 2008-09 financial crisis that enabled peer-to-peer monetary transactions without the involvement of a third party such as banks.
Some prominent cryptocurrencies are seen as having a lot of value in them. In contrast, the value in others such as Dogecoin is inflated solely on investor speculation based on Musk’s weight behind it. For the uninitiated, Dogecoin was created as a joke and is derived from the popular Doge meme. A meme!
Lack of understanding of cryptocurrencies and blockchain is a big part of the reason what leads to an inflated value, which can come crashing down upon something as seemingly inconsequential as a tweet.
Besides Bitcoin, Ethereum went down as much as 40%, rebounded, and is now sitting at a position ~20% lower than on Monday. Binance coin declined 16% overall, Dogecoin by 14%, while Ripple’s overall losses are at 6%.
See Also: Major U.S. Banks on the Brink of Bitcoin Adoption
Wrapping Up
Long-term investors and believers of crypto aren’t the ones that participated in the sell-off. Retail investors are the ones that aren’t sticking around, which is understandable though this can prove to be a chance to average down.
China has already launched the digital Yuan, its central bank digital currency (CBDC). The country’s ban on cryptocurrency trading and transactions clearly signals that it is aiming to arrest the risks that go hand in hand with the price volatility of crypto.
As always pic.twitter.com/gtFmtokzEZOpens a new window
— Elon Musk (@elonmusk) May 13, 2021Opens a new window
There’s a chance that the events of this week are course correction in a highly inflated market. However, corporations that hoped to get cryptocurrency on their balance sheets may be discouraged if Musk doesn’t let go of the pendulum he’s hanging on. Musk’s present stance is to continue to hold and support Bitcoin, both personally and by Tesla.
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