It was the best of times, it was the worst of times. And now? Now there’s just the time where everyone who gives a damn is trying to figure out what exactly is going on with crypto. Since the start of 2021 there have been several severe declines in the value of cryptocurrencies, most notably that of Bitcoin. Given that it seemed that crypto was rumored to merge with more traditional financial business, these decreases are rather ill-timed, inconvenient or just plain suspicious. I thought I’d dedicate some time to figuring out what was going on, and actually write up my findings. So let’s go!
In the months of June and July of 2021, Bitcoin has dropped under the level of $30.000 several times, only months after reaching its peak of $60.000+ in April of the same year. This rather rapid decrease and continued downward trend has raised some serious eyebrows. Bitcoin wasn’t the only currency to drop in price. The cryptocurrency market was down 7.13% on the 20th of July. Other coins such as Dogecoin and Ethereum got hit badly as well, although the news mainly seems to focus on Bitcoin as it is hailed as the crypto flagship. Keep in mind though, Bitcoin and crypto are not synonymous with each other. Where Bitcoin dropped 6%, Doge and Ethereum dropped about 10%. However, the latter recovered much quicker and continued to outperform the S&P500, whereas Doge is in a bear market and Bitcoin did not manage to outperform the traditional stock market.
Why did this happen?
This specific drop coincides with continued pushback on cryptocurrency from China, including recent crackdowns on mining activity and crypto trading with China-based financial institutions. Bitcoin and other leading crypto coins experienced a significant drop in share price after investors began dumping mining equipment as China announced fresh regulations.
What do these regulations entail?
Financial institutions, including banks and online payments channels, must not offer clients any service involving cryptocurrency, such as registration, trading, clearing and settlement. Their motivation is as follows:
“Recently, crypto currency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order.”
It has to be mentioned that China has banned crypto exchanges and initial coin offerings but has not barred individuals from holding cryptocurrencies. It also has to be mentioned that China is developing its own government-run cryptocurrency.
Why does China have such a massive impact on the value of crypto?
An abnormal amount of crypto is being mined in China, as electricity and other resources are a lot cheaper to obtain in China than anywhere else. Moreover, this isn’t the first time China has done something like this either. In 2017 crypto prices crashed as well, as China shut down its local cryptocurrency exchanges, smothering a speculative market that had accounted for 90% of global Bitcoin trading. Both production and trading predominantly occur in China. If China says no, the crypto market suffers.
Is that it?
No not at all. These are just the latest in a series of factors that have contributed to crypto’s, but predominantly Bitcoin’s falling prices over the past few months. Other important factors are an influx of short-term investors, growing popularity of memecoins like Dogecoin, and even Elon Musk.
How’s Elon Musk involved?!
The better question is: when isn’t he involved? Mr. Musk has quite a lot to answer for as a single comment or tweet from Elon sends people into a spiral. Elon Musk has made multiple commitments to accepting crypto, most notably Bitcoin, to facilitate the trade between Tesla and crypto traders. In March 2021 Musk stated that that Tesla customers can buy vehicles with Bitcoin, which contributed if not predominantly drove the rapid increase in the value of Bitcoin towards its all-time high in April 2021. However, in May 2021, Musk had to retract this statement as finally someone informed him how resource intensive the mining of Bitcoin is. He tweeted out saying that Tesla will not be accepting Bitcoin as Tesla is “concerned about the increasing use of fossil fuels for Bitcoin mining and transactions.” The excessive use of fossil fuels would of course go directly against what Tesla is trying to do. Musk has also been accused of “pumping and dumping” cryptocurrencies, as he hypes up every currency he talks about. Musk simply revealing which cryptocurrencies he owns skyrockets their prices. When Musk mentioned he owned three cryptocurrencies: Doge, Ethereum and Bitcoin, the price of Ethereum rose to above $2000 and the more than 500% price surge for Doge has been largely attributed to Musk as well. His comeback from this was arguing that he does pump, but doesn’t dump – meaning that he does hype up certain currencies but doesn’t sell them on as soon as people are buying into the hype to make a profit. Musk has been criticised for the nativity of his attitude as other people do ride the coattails of his comments and pump and dump as a result of it.
What is pumping and dumping?
To pump a coin is to hype it up. In Musk’s case, this simply means stating that he owns it, or that Tesla is going to accept the coin. Often, a statement made by a “role model” that they own or recommend owning a currency (despite it most definitely NOT being financial advice) is often enough to increase the price of said crypto. Now obviously, the person hyping the currency already owns some of the currency and the only reason they are hyping it is so it increases the price and they can sell at a profit. The dumping part is when the price has finally increased enough to their liking and then they simply sell all their crypto assets in that currency, and tank the price right back down. So whoever does the hyping makes a profit, but no one else does. Often, the majority in these scams, because that’s what they are, loses money. YouTuber Coffeezilla has an entire video series on several social media influencers who use this approach to make more money, at the expense of their followers. These influencers are paid by the owner of the cryptocurrency to pump their currency and then get told when to get out so they make no losses. The losses are incurred by their often much younger following. Don’t think this is just a bunch of YouTubers doing this. The Kardashian-Jenner clan has also contributed to this nonsense. As if they needed more money… Quite frankly, I find these practices disgusting.
Anything else we should know about crypto?
Musk’s concern about fossil fuel usage is warranted. Crypto, but much more prominently Bitcoin, uses a lot of energy to be mined and traded. And that is a serious concern. Watch this video on how mining and trading impacts the planet.
When all is said and done, is crypto a good investment opportunity?
First, I’d like to argue that I’m not at all a financial advisor, but from what I can read, and hyperlink for you, the answer can be yes, but only if a long list of conditions are met with regards to your financial status (source NextAdvisor): “Some experts we’ve spoken to compare it more to gambling than traditional investments, so a good rule of thumb is to only invest what you would be OK losing. The smartest approach you can take to crypto investing is to make sure your overall financial health is secured before you do anything. That includes priorities like securing your emergency fund, investing in a traditional retirement fund, and paying off any high-interest debts. Because of the swinging price volatility, you don’t want any sum you invest in cryptocurrency — and could potentially lose — to hinder your other financial goals.” Well that seems like a hesitant maybe at best…
Is crypto the investment for you?
Well, it is your money, but my main question is, how well do you deal with volatility? Keep in mind, one year ago Bitcoin’s price was under $10.000. It has managed to hit over $60.000 in April 2021, and now in June and July of 2021 it’s going below $30.000 with some people arguing it’ll fall as far as below $20.000. Do you have the risk tolerance for this?
If you approach your crypto assets with a long-term mindset, you can better weather the volatility. Don’t let big price dips dictate when you buy or sell; instead, continue to invest only what you’re comfortable losing, even through the fluctuations. Then, like your stock market investments, you can take a hands-off approach, and monitor over time rather than keeping an eye on any daily or weekly changes. But like I said, not everyone can do this. And as gamified trading, thanks to app such as Robberhood, is becoming more popular, this may become more and more difficult.
Is this current downward trend a sign that crypto is on its way out?
Doubtful. What we’re seeing is that quite a few financial institutions and regulators are becoming increasingly wary. However, even the Chinese government is working on its own crypto, so it being on its way out would be very strange. Moreover, the Ethereum 2.0 project was designed to deal with one of the biggest drawbacks and concerns of Bitcoin: the massive amounts of resources needed to mine and use it. Several other cryptocurrencies have also been created to be much more energy efficient. Lastly, it seems that crypto crashing is almost cyclical, as we have seen similar crashes happen in 2017, 2019 and now in 2021, although the decreases now might be “too light” to be referred to as an outright crash.
I hope you enjoyed the article I wrote here about what, after careful research, I think is going on in the crypto market. If you have much more expertise on this topic, please let me know and do reach out! And without trying to instigate too much of an influence: do you own crypto?