The Crypto Market Crash

By Alisha Tan

Bitcoin and other cryptocurrencies, such as Ethereum and Cardano, have continually been reaching all-time highs during the current bull run. However, as of late, cryptocurrency traders and investors have been riding the wild, volatile crypto rollercoaster. In May, we saw the global cryptocurrency market capitalisation drop by more than 10 percent. 

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Source: CoinMarketCap

Just recently, Bitcoin plunged 31 percent, and on the same day surged 33 percent. In the span of about thirty minutes on May 19th, Bitcoin tanked to US$30,000, before immediately recovering back up to around US$35,000 and peaking at over US$40,000. 

Cryptocurrency rebounds from plunge

Source: Bloomberg

Market manipulation

Some have theorised that this sharp drop in the price of Bitcoin involved some market manipulation, as a post from the forum 4chan surfaced, revealing a user who correctly predicted the hour and price of the dip. The anonymous poster stated that China would be making an announcement with the aim of getting Bitcoin as low as possible before the dip, and that a co-ordinated sell-off would then take place in order to bankrupt a particular shareholder. The post then stated that after the big dip, the projected peak would be US$70,000.  

Source: 4chan

To further add to the speculation, a large number of crypto platforms went offline at the time of the dip, including Binance, Coinbase, Kraken and Bitfinex. As a result, many investors were not able to buy the dip, as Bitcoin recovered to US$35,000 by the time the systems had been restored. 

There have also been a number of other recent events that have contributed to the wider crypto market crash. 

Elon Musk’s tweets

We have seen recently just how immense of an effect that a single person can have on the crypto market. A week before the sharp dip, Elon Musk tweeted Tesla’s announcement, which stated it will no longer be accepting Bitcoin as payment for its electronic vehicles, due to the company’s concern for the “rapidly increasing use of fossil fuels for Bitcoin mining and transactions”, and that it will be exploring other cryptocurrencies that use less than 1 percent of Bitcoin’s energy. This came just two months after Musk stated that Tesla will be accepting Bitcoin as a form of payment in late March, and just three months after Tesla divulged its US$1.5 billion investment in Bitcoin in February. Following Tesla’s announcement, Musk made a tweet suggesting that Tesla would be selling its Bitcoin holdings, before confirming a day later that Tesla had not yet sold any Bitcoin. Finally, on May 20th, Musk made a tweet indicating that Tesla did not intend to sell any Bitcoin, making reference to the ‘diamond hands’ meme that originated from the subreddit r/WallStreetBets.

Inflation

Slightly prior to Tesla’s announcement, it was revealed that the United States Consumer Price Index (CPI) rose 4.2 percent in April from a year ago, which was greater than expected. In anticipation for the update, the stock market and crypto market had already begun to crash, as people feared that interest rates would increase in order to curb the high levels of inflation. However, fortunately for the stock and crypto market, Federal Reserve officials stated that the current rise is temporary and therefore will not influence monetary policy. Further, given the current and projected level of U.S. federal debt (see graph below), increasing the interest rate may be detrimental. 

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Source: Congressional Budget Office

Regulatory risks 

Another contributing factor to the crypto crash is the rise of regulatory risks in the crypto sector, particularly in China. On May 19th, the People’s Bank of China, reiterated its view that cryptocurrencies are not real currencies and therefore cannot be used as a form of payment. Following China’s warning against speculative crypto trading, Bitcoin dropped below US$40,000, a price unseen since February. As stated by Adam Reynolds, CEO for APAC at Saxo Markets, the statement comes as no surprise, given that avoiding the use of cryptocurrencies allows China to maintain their capital controls. On May 21st, the Chinese government also released a statement about “crack[ing] down on Bitcoin mining and trading behaviour”, which caused the price of Bitcoin to drop by 10 percent in a matter of minutes (see 1-minute candle chart below). 

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Source: TradingView

Further, the U.S. Treasury recently proposed a requirement for crypto transfers of over US$10,000 to be reported to the Internal Revenue Service (IRS), in order “to minimize the incentives and opportunity to shift income out of the new information reporting regime”, further contributing to the crypto crash. Hong Kong regulators have also tightened restrictions, proposing to ban retail crypto trading and requiring crypto exchanges to be licenced by the market’s regulator.

In conclusion, with the combined effect of market manipulation, inflation and regulatory crackdowns, we have seen a lot of volatility and price swings in the crypto market recently. However, many traders believe that we have not seen the end of the bull run, and that Bitcoin will bounce back in a matter of time. 

Sources: BBC, Bloomberg, Vox, YouTube, Business Insider, CNBC, Market Watch, The Guardian, Reuters

Disclaimer
The authors of this publication are not qualified to provide financial or investment advice and as such the content provided should not be construed in this manner. All information is intended purely for educational purposes and is provided for the personal interest of UNIT members. The opinions expressed within the article do not reflect those of UNIT as an organisation, its partners or its sponsors.