The crypto markets have witnessed a tremendous rally since the last quarter of 2020. The prices of the top ten coins, including Bitcoin and Ethereum, witnessed their all-time highs. It was only in the past week where we saw a liquidation sell-off that drove the prices down to almost 50 per cent of the levels from their recent highs. That being the case, the flow of investment in crypto markets has been rather encouraging since the third quarter of 2020 which supported the recent rally.

Before we address this dip, which people wrongly refer to as a crash, there are some points we need to closely look at, to get a perspective on the situation. Beginning in 2009, Bitcoin adoption and price-performance have mostly been retail-driven. It was individuals who were buying and selling cryptocurrencies. It’s important to know that the ones who created Bitcoin, withdrew themselves from the limelight. Since then, it has been individuals who believe in the fundamentals of blockchain technology, who have taken it forward. Bitcoin is a phenomenon that has no company attached to it. Nobody marketed it and no one promoted it. Given the state of the world economies, an asset like Bitcoin appealed to people who invested in it, and within the span of twelve years, it has taken a bigger shape today.

While it was mostly retail investors who were buying cryptocurrencies, it is only recently that institutional investors also entered in the foray after realising its value. They realised that it was profitable to diversify their asset holdings into an alternate asset class such as Bitcoin. Because of this, towards the end of 2020 and through the first quarter of 2021, we saw Bitcoin prices skyrocketing. Another reason for this rise in price was the speculative interest in the crypto markets wherein a massive number of new accounts were created. We also saw leveraged derivatives that were introduced in the space which paved a way for larger participation with a smaller capital engagement.

Coming back to the recent significant dip that we witnessed was a result of several factors. One among them is the liquidation of the leveraged long positions followed by a panic sell-off which might be triggered by rumours which we will examine.

Firstly, what we call this the Tesla-Elon Musk conundrum. The electric carmaker Tesla recently announced that it wouldn’t favour Bitcoin due to ‘environmental’ concerns because its mining requires electricity, which is mostly generated using fossil fuels and has, therefore, had a huge carbon footprint on the environment. This seems to be motivated and raises a few questions like– did not the Tesla management already know about the Bitcoin mining before diversifying and investing $1.5 billion in it? Isn’t the same electricity generated using fossil fuels that makes the Tesla cars run on? The University of Cambridge reports mention that hydroelectric energy is the most common form of energy used by crypto miners globally and its share is around 60 per cent. The other popular forms of energy used are wind (Asia Pacific– 23 per cent, North America- 22 per cent), solar (LatAm and North America– 17 per cent each), geothermal, nuclear besides oil, coal, and natural gas. The facts seem to be distant from what the public imagination has picked up and resulted in the panic-sell.

Secondly, the reiteration of a previously imposed Chinese restriction of 2017 did a good amount of damage. The fresh imposition of prevention of participation by financial institutions into this space by the Government of China can be held responsible. And finally, rumours of the United States Internal Revenue Services’ investigation into the largest crypto exchange Binance– although Binance is fully cooperating and nothing incrementing has surfaced so far – also weakened investor resolution.

So, to sum up, the major reasons for the crash were liquidations of leveraged positions and panic selling induced by fears, uncertainty, and doubts harming the investor sentiment. Having said that, it is important to know that this is very normal in the case of thin markets like cryptocurrencies. With larger adoption and participation, in time, these wild movements and knee-jerk reactions will thaw for sure.

The author is Co-Founder, Digital Techlab Private Limited (DigitX)

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