VYSYN Ventures Weekly Insights #42
Bitcoin’s recent rebound suggests that the bullish market momentum is not yet over and more upside movement could be in store. After reaching an all time high (ATH) of roughly $58.3k, Bitcoin recorded its second largest peak-to-trough percentage decline in 2021.
The magnitude of the pullback will not surprise cryptocurrency market veterans, who have weathered drops of roughly 50% within 48 hours on several occasions. The recent price drop extended to Ethereum and several other large-cap altcoins. In the latest VYSYN Ventures release, we analyze the potential drivers behind the recent drop.
Bitcoin Drop Sparks $1.68 Billion Liquidiation
The market reached its all-time heights after a series of bullish news developments. Elon Musk changing his Twitter bio to “#Bitcoin” and tweeting “in retrospect it was inevitable” brought an end to the volatile market conditions that characterized January. Tesla revealed that they purchased $1.5 billion worth of BTC in January provided the necessary fuel for Bitcoin to secure a firm foothold in the $40k territory. After testing and surpassing $50k, bullish momentum quickly carried BTC price to its $58.3k ATH.
The price fall that followed catalyzed significant long-side liquidations in the Bitcoin derivatives market, sparking a cascading effect that imposed further downward pressure on price. A total of $1.68 billion in leveraged long Bitcoin positions were liquidated on February 21, 2021.
While the market may have been overheated and due a retracement, there may have also been macro factors at play. Widespread concerns that rising U.S. Treasury bond yields might lead to a tightening of monetary policy by the Federal Reserve was one such factor. With the US public debt at 127% of the country’s GDP, the prospect of tightening interest rates raises fears that debt obligations will not be serviced, sparking a severe economic crisis. In such crises, the demand for cash would be anticipated to rise, and investors high-risk assets like Bitcoin would undergo some selling pressure as a portion of holders seek USD liquidity.
Bearish Bitcoin Sentiment Quickly Reverses
Prices have since picked up with prices quickly returning to roughly $50k at the start of March. Since the latest rebound, the implied volatility rate is decreasing to levels observed in early January. This is a good sign for the bulls, as decreasing implied volatility usually suggests a bullish trend.
Apart from institutional investors who liquidated long positions and are re-entering the markets at lower prices, Chinese retailers have been heavily involved in buying the dip using the stablecoin Tether (USDT). Recently, the Chinese Yuan strengthened against the U.S. dollar and the dollar-pegged USDT. Chinese traders use the stablecoin as an on-ramp to the crypto market, boycotting government-issued currencies in the process.
Bitcoin price is expected to achieve higher levels. One of the major trends in the Bitcoin and cryptocurrency markets in 2020 and 2021 is the influx of institutional participants. Among the major mainstream organizations that have joined the industry is PayPal. The payment giant has been reported by multiple sources to be in the process of buying the crypto custody firm, Curv.
Where Does Bitcoin Go From Here?
Before the recent pullback, Bitcoin capitalization crossed $1 trillion milestone, before dropping to around $888 billion at the time of writing. There have been predictions of how high this value could rise, and what impact it could have on the market.
Michael Saylor, the CEO of MicroStrategy has predicted that Bitcoin will surpass gold in terms of market capitalization. Currently, the value of the gold market is roughly $12 trillion. Saylor anticipates that the market capitalization of Bitcoin will grow to $100 trillion. He also expects that the cryptocurrency will become less volatile when its market capitalization crosses above $10 trillion.
There has never been a level of Bitcoin adoption like what has been observed so far in 2021. Mainstream application is becoming a reality and regulators are becoming more open towards understanding and accepting the implementation of the cryptocurrency. This and other reasons are seen as the fundamental elements behind the strong bullish sentiment in the market.
The characteristics of the Bitcoin and cryptocurrency market haven’t changed much. High volatility and sudden changes in direction still determine how small and midsized investors respond to the market. Perhaps, a better way to engage with the BTC markets would be to look at the bigger picture and hold for the long-term. Saylor certainly thinks so!