What Led to the Bitcoin Price Drop?

Yesterday, we saw one of the biggest market sell-offs in the past few years. A vast majority of the cryptocurrencies have lost more than 20% in their value, with the lowest price points being as low as 30- 40% in one day. Movements such as these are apparently still part of the crypto ecosystem, which has always been very volatile. Needless to say,  we haven’t seen a dramatic correction ever since the Covid-19 news. The question still floating in mid-air is what could have affected the cryptocurrency market, causing the huge selloff yesterday?

Many Possibilities

Tesla Turning Its Back to Bitcoin –  Elon Musk Critique of the Crypto Ecosystem

One of the most probable causes of a crash of the crypto this week is deeply connected to Tesla. After Tesla announced last week that it will not be accepting payments in Bitcoin anymore, then came a major shift in the market. As one would expect, this led to Bitcoin falling off below 50 000 dollars. So how does this explain yesterday’s crash to around 30 000 dollars? The reasons are simply twofold. Keep reading to find out.

The first one is obviously connected to Tesla’s CEO, Elon Musk who has been critiquing Bitcoin and the crypto sector as a whole ever since the announcement was made. In his recent tweets, he unapologetically and blatantly said that cryptocurrency “experts” are obnoxious, and Bitcoin is very energy inefficient”.  He added that the sector still has to improve significantly in many aspects such as scaling and transaction speed. Criticism like these from someone who seemed to be one of the biggest supporters of cryptocurrencies in the past few months might have caused a panic between new and inexperienced retail traders which in turn has led to the selling off.

Though not backed by any solid evidence, the other reason was a fear that Tesla did not only stop accepting Bitcoin payments, but was also the possibility that the company was going to sell its 1,5 billion dollars worth of this cryptocurrency. According to estimations, Tesla is holding around 43 000 BTC, however, fear and rumours spread in the whole cryptocurrency market that Tesla was selling all of its bitcoins. As it turned out, Elon Musk came to the rescue,  stating that Tesla has diamond hands, which is a reference to someone who is not selling but “hodling,” despite what the situation in the markets looks like. Since his announcement yesterday afternoon, the prices of most cryptocurrencies recovered at least  25-40%, with Bitcoin recovering 30%, Binance Coin 28%, Ripple 38% Ethereum 40%, Litecoin 42% and Cardano more than 65%, from their lowest price points.

Source: Tradingview.com

China Banning Cryptocurrencies Yet Again

If you are not new to this sector, you may have probably seen your fair share of bad news connected to China. The most memorable one was the 2017 China cryptocurrency ban, which led to about a 25% decrease in most of the cryptocurrency prices.

On Tuesday, news about China banning financial institutions from offering cryptocurrency services and products emerged, and therefore, it was only a matter of time, before this news impacted the markets. And as we saw yesterday, it did not take long before the market crash happened.

Extreme Fear

Another factor that might have contributed to the price correction was the market sentiment, which we already mentioned with Tesla. All the events aforementioned have caused the market to suddenly switch from extreme greed to extreme fear, which is represented by Crypto Fear and Greed index. This index has values on a scale of 0 to 100, with 0 being the biggest possible fear and 100 representing the biggest possible greed. Only a week ago, this value was around 70, which represents greed in the market.

Crypto Fear and Greed Index, Source: alternative.me

However, today the index is at 11, representing extreme fear. What this value basically represents is that the sentiment in the market is very bearish and that the investors are easily prone to be selling out of fear or panic. And yesterday, we were witnessing panic selling without any doubt, so it is possible that extreme fear and negative market sentiment could have also worsened the selloff.

Combination of All the Factors?

With so many things happening in the market, it is very possible that the price selloff was a combination of all the factors. Generally, it is very difficult to single out one event that was a cause of a specific price movement, which might also be the case for yesterday’s market crash. As you read earlier in this article, there are several events that might have contributed to the crash either together or separately.

No matter what the causes were, it is important to know that these types of situations can happen at any time. Unlike the Forex market, Stock market or commodity markets, the crypto market is relatively small. Therefore, it is always necessary to manage risk properly, ideally with stop losses or a prepared scenario even for bearish market movement such as the one we saw yesterday.

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