The 3-Month Crypto Roller Coaster
Written by: Dominic Marino
Published: 25th August 2021
Across May, cryptocurrency markets took a pause from a long run of sustained, unprecedented and unimaginable growth with a severe crash. Focussing on the two dominant market coins: Bitcoin plummeted approximately 45.6% over the period from May 13 to May 24, whilst Ethereum fell 55.4% during the same period.
It is not a surprise that cryptocurrency markets are markedly more volatile than equity markets. Look below to see the movements in Bitcoin against movements in the S&P 500 across the last 6 years, a proxy for equity markets - Clearly a significant disparity in the eracticsm between the two asset classes. Furthermore, because cryptocurrency’s value drivers aren’t as clear as equities, it is difficult to debunk what influences movements. Consequently, this article intends to analyse the causes of this recent market downturn and provide insight, using data, as to where the market might move.
What has caused the Market Movement?
Elon Musk’s busy thumbs have been a significant influence on crypto markets. On 13 May 2021, this rung true as he tweeted the following:
“Tesla has suspended vehicle purchases using Bitcoin. We are concerned about the rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal”.
This sudden flip was surprising considering Tesla had made a USD$1.5 billion investment in Bitcoin in early February 2021. Furthermore, despite citing environmental concerns, it is broadly accepted amongst investors that “up to 73% of Bitcoin’s energy consumption [is] carbon neutral, largely due to the abundance of hydro power in major mining hubs in Southwest China and Scandinavia”.
Negative sentiment was further compounded by China’s decision to ban finance institutions from facilitating cryptocurrency transactions. A large driver of value in cryptocurrency is ‘transactional adoption’; the idea that cryptocurrency value will grow proportionate to its integration within daily transactions. Whilst this policy barrier understandably damages value, the reality is that China’s hardline cryptocurrency approach is largely ‘normal’, reflecting by their past actions
2017: The country shut down local crypto exchanges
2019: China’s ‘People’s Bank’ vowed to block access to ‘Initial Coin Offering’ websites, both domestic and international.
Accordingly, as it stands the biggest opponent to cryptocurrency growth is regulation. Speculation of US-treasury limits on cryptocurrency transfers and maximum ‘declaration free’ transfer sizes have meant that to investors, cryptocurrency may not be as deregulated in the future as it currently is.
Reports during late May also revealed that sell-off may’ve been driven by trader leverage, where some cryptocurrency market participants had reached 100-to-1 leverage. More than $12 billion in levered positions were liquidated in 2 days, as traders were forced to sell following the continued slide in bitcoin values.
Bitcoin’s Previous Price History
The following table illustrates the price history of Bitcoin, which in this case, will be used as a proxy for the cryptocurrency market, considering its dominant size comparative to other coins.
By mapping out the last 3 Bitcoin cycles, if the market is currently in a bear market, it would take approximately 400 days to reach another period of significant, uninterrupted confidence. This would suggest a bull market occurring in June of 2022. Furthermore, since the Bitcoin dive in May 2021, the cryptocurrency has only lost 41% of its value. Based on historical data, this indicates that Bitcoin may have more room to fall considering in the last two ‘bear’ markets, Bitcoin lost on average 82% of its value.
Furthermore, note the price changes at the peak. 282% growth is significantly smaller than 1282% and 1310% increases Bitcoin has previously experienced. This reduced growth is simply a function of Bitcoin’s higher market capitalisation.
Where is Cryptocurrency headed?
Based on the past events and price history discussed, the following conclusions can be made on Cryptocurrency’s future.
1. The Bear Market will not last as long as historically suggested
In 2013 and 2017, Cryptocurrency and particularly Bitcoin, faced different market sentiment premised upon uncertainty, fear and speculation. Prior to 2020/2021, the cryptocurrency ecosystem was propped up by dominant retail investors taking risks on an intangible coin beyond the control of governments and financial markets.
Now, it’s different. Value is not only being supported by its scarcity and its mystery, but rather the reality of mass adoption. Institutions are quickly adding cryptocurrency onto their balance sheets, and Goldman Sachs now recognises it as a legitimate asset class. In fact, the balance sheet impact is a real potential valuation technique - the assumption is that if all corporates sitting on the S&P 500, similar to the company ‘Square’ (which has already owns 4,709 BTC as of May 20201, and presented cryptocurrency as a functionality pairing with its new acquisition, APT), replaced as little as 1% of cash reserves with BTC, its price per unit could jump just shy of $50,000.
Source: 2021 Ark Invest - “Big Ideas” Presentation
In March of 2018, the estimated daily value of all cryptocurrency transactions on the blockchain was USD218.963m. In May 2021, this reached 12.095b. Accordingly, this indicates stronger transactional use of cryptocurrency in more standard settings. Whilst we are far from universal adoption, and fiat currencies are firmly the medium of exchange, crypto markets are expected to positively respond from continued increases in adoption, negating the potential for a prolonged bear market.
2. Cryptocurrency will improve upon its environmental signalling
“The modern day anti-fossil fuel narrative is extraordinarily powerful”. A single Elon Musk tweet airing such concerns sent the market into a nosedive. Despite Bitcoin driving the adoption of renewable alternatives in a market driven way, the dominant view as presented by the media is that cryptocurrency is bad for the environment.
Alongside stronger adoption, there will be better consensus understanding around the mining process. The reality is, much of the infrastructure supporting cryptocurrency is still not understood. The waves of retail investors dumping savings in the hope of replicating the stories they read on reddit pages, are unlikely to appreciate the environmental consciousness with which cryptocurrency is mined.
Total cryptocurrency mining energy consumption in 2020 reached 77.78 terawatt-hours per year, comparable to the total energy consumption of the Netherlands, with a population of 17.5 million.
Thus, mining operations must be centralised where energy is cheap - and coal’s non-renewable classification is bad news for cost. Accordingly, more than 50% of global mining is centralised in Sichuan, China. This is due to its incredibly low cost power derived from hydro. 95% of power in this area is renewable. This is also supported by China’s ‘green-tech’ 5 year plan.
Tatiana Revoredo, founding member of the Oxford Blockchain Foundation says this
“many renewable energy generators are poorly located and underutilised, and thus, Bitcoin mining has become the only viable use for this electricity”. Thus, Bitcoin makes better use of renewable energy sources than any large scale industry in the world. ”
And now Fast Forward 3 months...
August 2020. That bear market didn’t last too long. Maybe this is a short break before cryptocurrency continues its drop. Irrespective, cryptocurrency is back up, confidence is higher, and the ‘Fear Greed Index’ is ticking around 80, 6.25% lower than it was in March-April 2021. Let’s enjoy it whilst it lasts. Importantly, this growth may not be tied to the reasons it was down in May. Those issues are still prevalent. Functionality improvements and investment volume are the catalysts behind the market jump.
Ethereum v 2.0 and Cardano Smart Contract Development - Crypto with purpose
Cryptocurrency values are going to jump when the second and third largest blockchain technologies globally announce platform upgrades.
Here’s what is changing for Ethereum, under the “London” hard fork update
Transition from proof of work to proof of stake, which in layman's terms, is a transition from a highly energy intensive mining system where miners use computers to solve complex mathematics to mine new coins, to a new system where coin mining will be based on how many ether, or “stake” users have. This should increase the scalability of Ether, and reduce the energy consumption of the network.
Reduction in the number of ETH circulating, which will support its high market value and make transaction fees more stable, lower and predictable. That’s a win considering this is the fluctuation of transaction fees, year to date. It’s still too expensive to be viable, and this should fix it.
Transform ETH into a deflationary asset: ETH will join its big brother, Bitcoin, in being labelled as a ‘store of wealth’ style asset, sure to aid institutional adoption. Bitcoin’s ‘wealth storage’ functionality is a large reason why important names have allocated important money to BTC. Think JP Morgan, Morgan Stanley, Ark Investment Management, Tesla, Stanley Druckenmiller and Jack Dorsey.
And how has the market reacted? Strong. Very Strong
Lets not forget about Cardano either!
They’ve announced the integration of smart contracts in their September 12 “Alonzo” upgrade. This has been its long term goal, and smart contracts will allow developers to build apps that take advantage of Cardano’s blockchain, and its security, reliability, accessibility and P2P functionality - here, we can develop applications ranging from insurance to gaming.
Institutional Investing back in business
A July Reuters report published that Fidelity’s cryptocurrency arm determined that 70% of institutional investors expect to invest in, or purchase digital assets in the future, as part of a 1,100 investor sample size. Further, 50% still currently hold digital asset investments.
Thus, it’s clear that investors understand cryptocurrency as a profit opportunity. But what about the long term?
More than 90% of those surveyed (who, by the way, were high net worth investors and hedge funds) expect digital asset investments to gain in weighting as part of their company or client portfolios, across the next 5 years.
This growth has been facilitated largely by improved accessibility. Southeast Asia’s largest bank, DBS, for example, launched an institutional investor only digital trading platform, which has grown in trading volume by 10x, with now “$80 million in assets under custody”.
Venture Capital Funding Booming
We aren’t even in Q4 of 2021 yet, but more than $3.9 billion has been allocated to just 10 cryptocurrency and blockchain startups so far. These 10 financing rounds represent 10 of 12 largest 12 rounds ever completed since 2009. A couple of investment highlights include:
FTX: $900 Million, July 2021
BlockFi: $350 million, March 2021
This trend is important for two reasons:
Blockchain Startups now have stronger funding positions to self invest in innovation, within a rapidly growing industry where funding can be selective and hard to obtain. Being able to throw cash at profitable and intelligent projects can have a multiplier effect on company customer retention rates, top line growth and competitive advantage development.
Funding assists in building a healthy ‘war chest’ to attract talent and leadership. Companies are built by people. Having a skilled team improves the development of creative strategies and innovative outcomes, which is vital within a sector that thrives on differentiation. Equally, having the right management can ‘make or break’ firms.
