Letter #7: Bitcoin and the Bear (?) Market

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It’s been an “exciting” few weeks for Bitcoin and cryptocurrency, and many, in particular newer participants in the space, will say that the excitement has been of the worst kind. At the time of writing, Bitcoin and Ethereum, the two bellwether cryptocurrencies and the largest by market cap, are both down about 50% from their respective all-time price highs set just a few weeks ago. Various smaller cryptocurrencies, known collectively as “altcoins”, are also off by between 30% and 70% from their own recent price highs.

So what happened that caused the cryptocurrency markets to see such chaos over the past two weeks? Is this normal for cryptocurrency? And is Bitcoin actually “dead” as so many of its opponents have claimed on Twitter and in the media?

FUD - Fear, Uncertainty, and Doubt

If you start getting familiar with cryptocurrency, not too long will pass before you hear someone talk about all of the “FUD” that happens within cryptocurrency. “FUD” is an acronym that stands for Fear, Uncertainty, and Doubt and it refers to any bit of news that becomes widely known and, more specifically, causes people to lose faith in the cryptocurrency markets. FUD often leads to “panic selling”, most commonly by new investors in the market, and any time there is a greater number of sellers than buyers in a market, an asset’s price will decrease to compensate for lesser demand. An excess of FUD in cryptocurrency markets is something that happens quite regularly, and this month has been no different. Let’s dive into the newsworthy events over the past few weeks that have created fear within cryptocurrency markets.

Bitcoin, Elon Musk, and his environmental woes

The process of adding new Bitcoin into circulation, known as “mining”, uses a lot of energy. You may have recently heard many people compare Bitcoin’s energy use to the amount of energy used by entire countries, like Argentina and The Netherlands. For context, all of the gadgets we use these days, from phones to cars to appliances, require energy to work. So perhaps focusing on the amount of energy Bitcoin uses isn’t the appropriate way to frame the argument. Regardless, a lot of self-proclaimed experts have called out Bitcoin because of the supposed environmental impact of Bitcoin mining. Many Bitcoin supporters claim that the majority of Bitcoin’s energy comes from renewable sources like solar, wind, and hydro power. However, Bitcoin’s opponents claim just as loudly that Bitcoin’s energy must come primarily from “dirty” sources like fossil fuels since a lot of Bitcoin mining takes place in oil and coal rich areas like China, Iran, and Venezuela.

Elon Musk apparently recently found himself in the latter camp. Elon, a vocal proponent of various cryptocurrencies at times, made waves back in February when it was announced that his company, Tesla, had purchased $1.5 Billion US dollars worth of Bitcoin to hold on its balance sheet. He even announced a few weeks later that Tesla would allow its popular cars to be purchased with Bitcoin. In many ways, the camaraderie that many in the cryptocurrency space began to feel with Elon Musk seemed natural. His apparent betrayal of Bitcoin earlier this month shattered those feelings very quickly.

On May 12th, Elon shared the following note about Tesla and Bitcoin to his Twitter feed:

While his note was specific to Bitcoin, most cryptocurrencies immediately felt pains alongside it since Bitcoin sentiment is commonly intertwined with sentiment for the entire cryptocurrency space. Investors around the world, including surely some of Musk’s own 56 million Twitter followers, sold their Bitcoin in droves as they believed that Musk’s environmental concerns may spread to other institutions in the space that have already invested or are considering investing in Bitcoin and other cryptocurrencies. Bitcoin’s price fell nearly $10,000 dollars in just a matter of hours as markets reacted. But the FUD wouldn’t end there.

Chinese and U.S. Regulators - Bearish Bias Confirmed?

To be clear, China has often espoused “bearish” or negative sentiment towards cryptocurrencies and has instituted several soft-bans against Bitcoin and other cryptocurrencies over the years. China’s distrust of cryptocurrency was reiterated on May 18th when three Chinese governing entities banned local banking and payments institutions from providing cryptocurrency-related services. Cryptocurrency sellers reappeared en masse as they feared China’s announcement would severely impact local cryptocurrency markets, which are some of the largest in the world.

Regulators within the United States, seemingly not wanting to be left behind by their Chinese counterparts, had a pair of bearish pronouncements against cryptocurrencies of their own. On May 19th, the new head of the United States Office of the Comptroller of the Currency rattled investors by calling on his staff to review regulations put in place by the previous department head that were favorable towards cryptocurrencies in that they allowed banks and other financial institutions to interact with and custody cryptocurrencies. Next, in an apparent attempt to clamp down on claimed tax evasion taking place through use of cryptocurrencies, the United States Treasury announced on May 20th its intent to ensure that any transaction in excess of $10,000 US dollars be reported to the Internal Revenue Service.

This one-two punch from Chinese and U.S. regulators sent cryptocurrency prices into a tailspin. At its lowest point thus far, Bitcoin’s price almost touched $30,000, more than a 50% drop from the all-time high of nearly $65,000 set only last month. Perhaps the true irony in all of this government-centric FUD is that one of cryptocurrency's greatest strengths is meant to be its separation from control and influence by any one entity, especially governments. This week has certainly shown that cryptocurrencies still have work to do in order to achieve that goal.

Are Bitcoin and other cryptocurrencies “dead”?

This may seem like a silly question to many readers, but in reality, Bitcoin has been pronounced “dead” over 400 times in its 12-year lifetime. It is common for Bitcoin’s opponents to use times of massive price decline to declare that Bitcoin and other cryptocurrencies are a useless waste and will soon disappear.

I typically shy away from making predictions and none of what I say should be construed as financial advice. That said, I find it hard to believe that the developments mentioned above or any potential future development will be able to stop the long-term progress of Bitcoin. Millions of people have made their way into the cryptocurrency space and, until the current price drop, Bitcoin had spent several months among the ranks of other asset classes worth more than $1 Trillion US dollars like real estate, stocks, and gold. The use cases for cryptocurrency are seemingly endless as they are being used to save money, replace banking, and secure assets.

Cryptocurrency prices are nothing if not volatile and we should not expect that to change while investors, institutions, and governments have such diverse opinions about the space. Volatility has been called cryptocurrency’s greatest feature by some and its greatest flaw by others. Either way, it is up to every investor to determine what level of volatility is acceptable to them and then invest or not invest accordingly.

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