The Reasoning for the Recent Crypto Market Crash Plus What Now?
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Hashrate was built to help guide readers through blockchain by examining different projects from a fundamental perspective with an emphasis on the technical and business implications of the projects with limited content surrounding price action. Don’t worry, you will be back to your regularly scheduled programming next week. However, unless you have been living under a rock you know that this week has been a whirlwind of emotions for investors, so we think it requires some special commentary.
Coming off a run that saw Ethereum setting a new ATH (all time high) at nearly $4.4K, the market dropped sharply bringing Bitcoin down to $33.5K and Ethereum to just over $2K. FUD (fear, uncertainty, and doubt) took a stranglehold and sentiment among retail investors has reached rock bottom before rebounding Monday.
Now that tensions are easing we are left to wonder, what happened?
The Straw That Broke the Camel’s Back
There are a two events that many are pointing to for the sell off:
Elon Musk announcing via Twitter that Tesla will no longer be accepting Bitcoin due to environmental impacts of mining
China intensifies regulations around cryptocurrency mining and exchanges
These announcements occurred within 48 hours of one another and produced a double whammy effect which dropped the market 30%.
Both of these events present legitimate worries, but they only present limited fundamental concerns in the mid to long term. During a normal bull run 25-30% corrections are normal and healthy events, however, what caused this 50% correction was the result of leverage.
So Many People Got Rekt
There was an absolute ton of leverage in the system. Leverage is what turns these normal healthy corrections into the immediate, violent, and cascading drawbacks like the one experienced this past week. When Bitcoin was hovering around an ATH at 64k and then dipped to 55k many traders doubled down on their leverage creating a dangerous cocktail of open interest. At this point many opportunistic whales took notice and began relentlessly spot selling in order to liquidate more traders. This drove the price down lower and lower, allowing them to buy back in at a lower price.
Now there is a ton of leverage flushed out of the system. When you are liquidated like the hundreds of thousands of traders who have been this week, your leverage goes to zero causing open interest to be cut in half.
Now that the market is seemingly rebounding nicely this seems to be more and more the case. This was a terrifying but necessary event over the length of the market cycle.
What Now?
If the market continues to stabilize and recover like it has then we should be back to business as usual. Perhaps not the extreme gains we have seen since the beginning of the year, but rather a calmer market moving into the summer. This could be good for the crypto realm as it may help investors to shift their focus away from memecoins and making a quick buck back to supporting projects that bring real value.
If this recovery is really just a short landing before further falling, then it may serve to thin the herd of crypto investors short term. The mania that has been the beginning of 2021 is reminiscent of the climb in late 2017, with many buying in for fear of missing out on potential profit. This craze over crypto leads to people making investments outside of their means and the creation of scamcoins that take advantage of the uninformed. Both of these bring negative news and an overall bad look, further causing FUD.
Either way, the market activity of the past few weeks is exactly as the term implies: a correction. It was a short term pain that is necessary for long term market health.
TL;DR
Elon musk and China related FUD/news dropped the market low enough to light the match on the dynamite that is over-leveraged traders getting liquidated.