Why did Bitcoin crash?

Why Bitcoin dropped below $30,000 and how is the Crypto Market Crash connected to China’s Crypto ban?

The crypto market landscape took a truly post-apocalyptic turn last week, as Bitcoin plummeted from over $45,000 to under $30,000 and Ethereum dropped from $3800 to under $2500 at their lowest point – all within one day. Crypto’s price plunged in response to Tesla’s Bitcoin payment suspension, coupled with China’s cryptocurrency ban, effective from Tuesday 18th of May. Within 24 hours, the overall market cap of cryptocurrency assets dropped by 25% (from slightly over $2 Trillion to under $1.5 Trillion), with both Etherereum and Bitcoin taking a hit of over 30%.

The fallout of these events is still observable on the market charts, as despite hovering just below the $40,000 mark, Bitcoin is yet to make a run at its previous price level. But what are the exact reasons for cryptocurrency losing half of its credibility as an emerging universal form of payment? There are several components, which may have cumulatively resulted in Bitcoin’s fall from grace.

The Causal Effect of Elon Musk Tweets on Cryptocurrency

Elon Musk’s decision to suspend Bitcoin payments for Tesla electric vehicles turned out to serve as a preamble to the financial cataclysm. On the 12th of May, The Tesla CEO raised his environmental concerns, criticising Bitcoin’s dependence on fossil fuels, especially coal, for ‘mining’ (aka hashing) and transaction processes. His Twitter announcement of ceasing Bitcoin payments while awaiting crypto’s improvement on sustainability, resulted in an instant price drop, from almost $55,000 to roughly $50,000 within a day.

The next stage of crypto liquidation started on Sunday the 16th when the world’s most famous crypto-influencer, Elon Musk, criticised Bitcoin’s mining giants in China, responsible for the majority of mining activities globally. As Elon pointed out, a handful of Chinese companies gained so much control over the crypto mining market, that it can no longer be considered decentralised. Shortly after his tweet, Bitcoin started falling down the charts.

A Textbook Example of a Financial Bubble

Despite the devastating effects of Elon’s suggestively equivocal social media communication, Bitcoin still seemed like a valuable asset to consider when building an investment portfolio. Traders, and especially crypto veterans were still hoping for the digital coin to regain its ground and start another bull run, as it did so splendidly at the beginning of the year.

On Tuesday 18th of May 2021, China warned investors against speculative crypto trading. As Chinese officials declared cryptocurrency illegal, the market tension finally burst and investors started liquidating their assets en masse. As a result, Bitcoin’s value began cascading painfully, dragging the entire crypto market down the charts with its devastating tide.

Within one week, both Bitcoin’s price and Crypto market cap returned to where they were standing at the beginning of January 2021. The Crypto Dip has wiped out all the price growth and developments of the past months, alongside crypto’s newfound reputation as a respectable asset.

Will Bitcoin Recover?

Cryptocurrency’s fate is impossible to determine precisely, with an equal share of market specialists forecasting drastically discordant scenarios. According to crypto enthusiasts, Bitcoin’s price is destined to eventually reach over $100,000 per coin and replace the US dollar as the reserve currency. With the same level of devotion, other specialists anticipate Bitcoin will soon disintegrate as an asset and eventually “come to Jesus”, as veteran analyst Peter Brandt warned at the beginning of May.

Noteworthily, this seemingly unprecedented, once-per-decade drastic shift in value has already occurred repeatedly in the past (the last time being merely a few months ago, in January 2021) and will most likely happen again in the future. The horrific shock-wave that we can still observe rippling throughout the crypto market, is in fact a completely normal phenomenon, strictly associated with the cryptocurrency’s inherent attributes; the lack of intrinsic value, anonymity and decentralisation.

China Bans Bitcoin and Other Cryptocurrencies

These drawbacks ultimately led to China issuing new restrictions on Bitcoin, inclusive of registration, trading, and settlement services. On Wednesday 19th of May, Beijing banned banks and payment processing companies from providing services related to cryptocurrency transactions. In the official statement, released jointly from three Chinese financial organisations overseeing their respective industry segments; the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China, we can read;

“Recently, cryptocurrency 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.

Virtual currency (…) has no monetary properties such as legal compensation and compulsion, is not a real currency, and should not and cannot be used as currency in the market.”

China has been trying to ban crypto at least once every bull cycle since 2017, in order to restrain money laundering and drug trafficking practices. However, as Chinese citizens were still able to trade in currencies such as Bitcoin online, the local crypto market has since then vigorously rebounded. It might seem that the Chinese government’s attempts to curb the enthusiasm for crypto might now be more successful, as the newly reiterated ban has since then greatly expanded, and now covers a wider range of services.

Contrary to what this ban could suggest, China has been the superpower behind crypto for years, solely responsible for over 75% of Bitcoin mining globally. This is one of the reasons why Elon has been so reluctant to fully embrace cryptocurrency as a form of payment. Especially, in light of the Chinese giants trying to forcibly claim control over Bitcoin mining processes, thus centralising it in a borderline unlicensed manner, his tweet might not be as puzzling as it seems.

Is Bitcoin Sustainable?

This week in finance has painstakingly exposed almost every single aspect of Bitcoin that is reflecting badly on its ambitions of taking over the world as a dominant form of money. Bitcoin has never been sustainable nor safe to invest in. In all its progressiveness, cryptocurrency might still be far too flawed to provide more than just a punting utility. Ultimately, crypto is famously volatile and is expected to continue fluctuating rapidly, even if appreciating over time.

What the decade-old history of crypto has taught investors thus far, is that every drastic increase of value will eventually be followed by a nauseating market correction.

The Kinesis Reliable Solution

Yet, there is another solution emerging on the market, capable of catering efficiently to any investor looking for a reliable asset that could enrich their portfolio. An asset, which unlike cryptocurrency – is intrinsically based on the stable value of physical gold and silver. As in Kinesis’ KAU and KAG example, digitalised physical gold and silver are dependable, hold enduring value, and typically appreciate over time. At the same time, KAU and KAG are easily instantly transferable via the blockchain and instantly spendable via the Kinesis Virtual Card.

Gold and silver are comparatively resilient to the galloping inflation and the ever-growing financial turmoil, while both fiat and crypto markets face economic uncertainty. It might be possible that the lack of any intrinsic value is the ultimate reason for Bitcoin falling from grace ad nauseam, as well as the Crypto Market Crash currently taking place.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.