Bitcoin, Ethereum Down over 50% from this Year’s High

On May 19th, various cryptocurrencies including Bitcoin (BTC) and Ethereum (ETH) together all dropped enormously.  Bitcoin is now down over 40% from this year’s high and has given up all recent gains. The reason for Bitcoin’s plunge is largely considered due to negative news from China. On May 18th, China’s National Internet Finance Association, Banking Association, and Payment & Clearing Association released a statement saying “cryptocurrencies have no monetary properties and are not a real currency. They should not be used as currency on the market and are unusable virtual products”. “Chinese financial institutions may not use virtual currencies to set the price of products or services and virtual currencies may not be included in insurance coverage”, the statement continued. After this type of content was spread through the People’s Bank of China’s WeChat, a sudden drop in Bitcoin price was observed. According to cryptocurrency media outlet Decrypt, “Bitcoin’s recent plunge was brought on by the Chinese Payment & Clearing Association halving the number of financial institutions participating in crypto transactions”. Meanwhile, additional sanctions related to cryptocurrencies continue to be enacted in China. On May 26th, Xinhua, China’s state news agency, reported: “mining and leveraged trading will become the main targets of cryptocurrency regulation going forward”.

This sparked a large-scale selling spree among leveraged investors, further expanding the size of the price drop. According to this account, investors who have recently been optimistic about the market situation purchased Bitcoin on a large scale by applying leverage and are now seeing their investment losses further exacerbated. This is backed by the observation that as Bitcoin tanked, investors were unable to meet their margin payments on time leading to a large-scale liquidation of leveraged holdings at market price. On May 20th, crypto media outlet cryptonews reported “According to data from Bybit, $8.7 billion worth of capital was liquidated over the past 24 hours on the derivatives market”, adding “Especially Ethereum (ETH) investors saw over $2.3 billion in losses”. Repeated selloffs on the futures market further accelerated the downtrend. Sam Bankman-Fried, CEO of FTX, described the recent selloffs in a May 19th tweet: “Those are some big liquidations…”.

After end of bull run, beware of more volatility for Bitcoin

After plunging by more than 50%, analysts are concluding that the bull run is over. As the cryptocurrency market becomes even more unstable, Bitcoin volatility is expected to further increase. Writing for NewsBTC, analyst Tony Spilotro observes: “The Chaos in Bitcoin and Crypto is Only Beginning”, concluding that looking at historical values, Bitcoin could either continue to fall or start rebounding. “It is only now with a mere 50% crash that volatility is picking up, suggesting either further collapse, only the start of the bull run, or possibly both scenarios. […] If Bitcoin price can close back the monthly candle above around $45,000 the evening star pattern will be defended for now. The next monthly candle will need to be green to ensure the bull market is still intact, otherwise, bears will complete the pattern in their follow up.”  In a May 25th CNBC interview, a spokesman for investment bank Mizuho Financial Group warned “The sharp decline in the prices of bitcoin and other cryptocurrencies in recent weeks has raised risks for a ‘crypto winter’”.

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On the other hand, others stress that Bitcoin’s long-term prospects remain positive. Writing on Twitter on May 20th, CoinCorner CEO Danny Scott wrote “1st dips can be scary, but this is normal for a bull run. Fundamentals have not changed. Infrastructure building has not changed. Bitcoin becomes stronger from these events. Focus on the long term, not the short. The good news from today’s dip is everyone has forgotten about #Bitcoin boiling the oceans.” Ark Invest founder Cathie Wood was similarly optimistic in a recent Bloomberg interview “bitcoin will go to $500,000 despite the largest cryptocurrency plunging to a low of almost $30,000 on Wednesday”. In a related observation, investment whales are actively seeking opportunities to buy at low prices. Crypto news outlet Cointelegraph noted: “Bitcoin’s big players are actively buying at the bottom. […] Now that the correction is coming to an end, optimism is on the rise”.

Some also opine that the industry will continue to hold Bitcoin regardless of the recent plunge.  MicroStrategy founder Michael Saylor tweeted on May 19th: “Diversification is selling the winner to buy the losers. I’m not selling”. Tesla CEO Elon Musk also revealed that the company had not sold its Bitcoin holdings, saying that Tesla had a “diamond hand”. On US financial markets, a diamond hand is considered ‘something that should not be sold and continue to be held even in a downturn’. TRON (TRX) founder Justin Sun also recently revealed that he had purchased additional Bitcoin and Ethereum: “I have bought 4145 #Bitcoin with $152,818,183 at average price $36,868. I have bought 54,153 #ETH with $135,891,796 at average price $2509”. Ray Dalio, founder of the world’s biggest hedge fund, Bridgewater Associates, concurred: “cash is trash. I mean, I’d say that because it’ll have that negative real return”, adding “I have some bitcoin”.

Bitcoin regaining attention as an inflation hedge

As US president Biden announced a massive budget proposal, analysts consider Bitcoin and Ethereum prices likely to rise again. On May 27th, President Biden proposed a 6 trillion-dollar budget to stimulate the US economy. On the same day, the New York Times reported: “The president’s plans to invest in infrastructure, education, health care and more would push federal spending to its highest sustained levels since World War II.” Decrypt observed “The price of Bitcoin jumped roughly 7% following the news, trading above $40,000, but has since retraced its steps.” As greater government spending can lead to inflation, there is renewed interest in Bitcoin with its limited issuing volume. As Decrypt notes: “Bitcoin—and stocks—tend to do well on news that the US government will up their spending. This is because big government spending, according to some analysts, leads to inflation so investors are likely to look to other places, such as scarce assets, to plug their cash.” “Large amounts of Americans receiving stimulus checks, which are part of Biden’s big COVID-19 relief package, have previously said they are keen to spend it on Bitcoin, according to surveys”, the report added. Famous Bitcoin analyst PlanB also tweeted on the 27th “#bitcoin has no top because fiat has no bottom”, underlining his positive outlook on Bitcoin prices. Cointelegraph similarly finds “The release of the 6 trillion-dollar federal spending budget presents a chance for Bitcoin to cross the $40,000 mark”.

There are also observations that the uptrend of Ethereum (ETH) has not stopped. Expectations are rising that an additional increase may start from this July. Guggenheim co-founder Todd Morley remarked that the recent sudden price changes were because the market is small and liquidity is lacking, adding “Ethereum has “much higher utility” than Bitcoin”. While the ETH price recently dropped significantly, the long-term outlook remains positive. As crypto media outlet AMBCrypto reported “[Ethereum’s London hard fork], which is expected in July, could actually prove ETH to be a deflationary asset in the long run. […] The current price level is one of the remaining few opportunities to accumulate Ethereum before the rally resumes.” Through Ethereum Improvement Proposal 1559 (EIP-1559), Ethereum Foundation plans to burn ETH every time it is used for fees.  In AMBCrypto’s analysis “Particularly in the case of Ethereum (ETH), the ever-decreasing supply following the July update will make it a deflationary asset. […] This could make ETH a measure against inflation of existing currencies”.

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