The Bloodbath in the Crypto Industry and its Implications

All major and minor cryptocurrencies have seen major corrections in the past week. The whole crypto market which was standing at over 2.5 Trillion dollars on May 12, 2021, plummeted to as low as $1.4 Trillion a week later. All major coins like Bitcoin, Ethereum, Litecoin etc. saw a fall of over 40%. There was an absolute bloodbath in the market. Let us decode what really happened with facts for our viewers to make a rational decision.

Tesla Stopped Accepting Bitcoin for its vehicle purchase

The first tweet which gave the market first shock was Elon Musk’s statement which quoted that Tesla has suspended vehicle purchase using Bitcoin due to overuse of fossil fuels in Bitcoin mining. This sparked a lot of uncertainty in the crypto market. There were very heated discussions over it where the Bitcoin supporters came out claiming the use of renewable sources in crypto mining which pissed off Elon musk to a very great extent.

Tesla & Bitcoin pic.twitter.com/YSswJmVZhP

— Elon Musk (@elonmusk) May 12, 2021

One of the tweets quoted “With the amount of heat Elon is getting, he might sell off all the Tesla holdings. We would only know when the second-quarter results are out. Elon was so pissed that he replied - “Indeed”. This fueled the real spark in the market, and we saw a massive drop of around 400 Billion dollars in the next 24 hours. While there was a small recovery made later when Elon tweeted an image quoting “Don’t panic” but the harm was already done.

Bitcoiners are going to slap themselves next quarter when they find out Tesla dumped the rest of their #Bitcoin holdings.

With the amount of hate @elonmusk is getting, I wouldn’t blame him…

— Mr. Whale (@CryptoWhale) May 16, 2021

Reuters report on China x Crypto Ban

The market had not even recovered from the Tesla frenzy when Reuters claimed that China has banned financial institutions and payment companies from providing services related to cryptocurrency transactions and warned investors against speculative coin trading. The National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China reiterated their stance on banning crypto services.

This was not a new news piece as China had banned in 2013. But it worked out like fuel for a massive selloff. China is responsible for almost half of Bitcoin mining activities and while mining is still legal in the market, the unregulated market was terrified with the news as the security of the whole Bitcoin network depends on the mining activities.

Technical Indicators

As per the market indicators, Bitcoin which constitutes almost half of the market cap of the cryptocurrency industry was in the overbought region due to its massive rally in the past few months which clearly were indicating for a long-overdue correction. As of May 9, 2021, the greed index was at its peak. These were clear market indicators indicating that the market will correct. Elon Musk’s tweet instilled fear in the minds of people and the Chinese news made it worse.

Exchanges went down due to massive volumes

When we were seeing a massive sell-off in the market major exchanges like Binance, Coinbase, went down adding to the ever-increasing fuel of mass panic. Further, investors were ready to get back whatever was left of their capital. Thus, it triggered the market to plummet even lower.

Chain Data reaction

Several other factors are looked upon in the market, which are:

The total inflow and outflow of Bitcoin’s from the exchange

As reported by CryptoQuant, around 1,61,000 BTC inflowed from the exchanges. This was the highest ever movement over 3 years. Thus, it fueled the investors to think that the institutions were selling off their Bitcoins. These Bitcoins were purchased off as there was an outflow of over 1,65,000 BTC later from these exchanges.

Stable coins across major exchanges at an All-time High (ATH)

This indicates that there were large volumes of money ready to buy off the fear when the retail market was in fear. The total amount of stable coins reached a two-year high of over 5 Billion dollars on the exchanges in the past week.

An unconfirmed leak claims this was a planned dump into the market. As can be seen from this thread all the events went exactly as stated. Bitcoin plummeted to 30,261.7 and showed a V-shaped recovery. This emphasizes the fact that; we need a desperate regulatory oversight.

All these events were the major reason why there was a bloodbath in the market and helped me conclude:

• A dire need for regulations and oversight.
• Impact that few people have over the cryptocurrency market. Examples include Micheal Saylor, Justin Sun and Elon Musk whose tweets later helped the market to recover from a great ordeal.
• These cryptocurrency markets can be highly manipulated and therefore are highly risky.
• The system, built of decentralized models, did not see any downtime. Further, they were intact even with huge volumes moving across the globe bringing a ray of hope that they can become the future of financial systems.

The author of the article is CA Aishwary Gupta, IIM-Alum, a digital asset researcher and a blockchain trainer.