VYSYN Ventures Weekly Insights #52 – We analyze the recent bearish movements in the Bitcoin market and consider them in the context of the broader trend
Elon Musk, the United States Treasury Department, and the China Bitcoin mining ban have all provided fuel for the recent price drops being recorded in the Bitcoin market. The FUD generated by these events all played a critical role in recent price movements and the market appears to be maintaining a broader downward trend.
With such volatile movements come significant losses for those speculators that left themselves overexposed. On May 19th alone, over $8.5 billion was liquidated as a result of speculators being overexposed in the cryptocurrency derivatives markets.
In the latest VYSYN release, we go into further detail considering the drivers behind the recent pullback in the cryptocurrency market. We also consider what the current data suggests about the outlook of the Bitcoin market.
The Tesla Effect
The recent Bitcoin sell-off accelerated in mid-May when Elon Musk tweeted that Tesla would stop accepting BTC payments for its products due to environmental concerns associated with Bitcoin mining. Conditions exacerbated when Musk made a suggestive tweet that indicated that Tesla may sell its current BTC holdings, resulting in the BTC price reaching a local low of $30k. Bitcoin price has since recovered to over $40k but quickly found seller liquidity and returned into $30k territory. At the time of writing, the price is trading between $35k-$36k.
Tesla played a pivotal role in the Bitcoin price appreciation earlier this year. In February, Tesla revealed that it had purchased $1.5 billion worth of Bitcoin to hold in their treasury. It further announced that it would begin to accept BTC for its products but this initiative has been stopped.
The Cyclical Impact of Bearish Movements
Peter Brandt presciently warned of a potential pullback. On May 2nd, Brandt warned that a pullback in the Bitcoin market would arrive that would wipe the wealth of countless cryptocurrency speculators. Those that would be particularly harmed would be those that were overleveraged.
Pullbacks and corrections are common in the Bitcoin market. There have been much greater peak-to-trough retracements over the lifetime of the asset. For experienced traders, they will have been positioned to handle such volatility. Employing tactics like hedging into USD and short-side derivatives positions will serve to alleviate the impact of recent downside movements.
Once the market begins entering a downtrend, a cyclical impact enters into effect that act as further fuel for the predominant direction of the market. Prior points of support begin to act as resistance and negative news bears more negative news. For instance, shortly following the Tesla announcement, China announced a crackdown on Bitcoin mining businesses that sent prices tumbling again.
Bitcoin Fundamentals Stay Intact
The cyclical impact of downward-trending markets normally dictates conditions in the cryptocurrency market. Despite this, fundamentals may be improving. One of the key fundamental indicators underpinning the market is Bitcoin hashrate. Hashrate follows price as price drops will make some miners unprofitable and force them to shut down their hardware.
However, when hashrate movements are inelastic to price movements (i.e. a decline in price causes a less pronounced decline in hashrate), this suggests that mining economics are still extremely healthy and that miners will apply less sell pressure on the market. When the opposite is true (i.e. hashrate responds elastically to price movements), the market is entering doldrums and may experience a prolonged period of stagnation as miners are forced to sell their treasury reserves of Bitcoin to stay afloat.
Hashrate estimates have been maintaining healthy levels, suggesting that few miners are impacted by the recent price slumps. Only the most inefficient miners will have been removed at this stage.
Bearish Bitcoin Conditions May Persist
As detailed above, the cyclical nature of the nascent cryptocurrency markets tend to dictate conditions. Despite some network fundamentals remaining strong, there is no denying that Bitcoin is in a broader downward trend. On the weekly chart, Bitcoin has formed a series of lower lows and lower highs. The current state may be only an intermediate stage of a longer downtrend. The bearish market conditions after 2017 persisted from January 2018 to March 2020. It may take an extremely bullish catalyst to break the prevailing trend prematurely. With corporations continuing to accumulate BTC, another institution announcing a purchase may provide the necessary fuel for such an event.