Written by: Yves, Head of Trading at Wirex
This week, the Bitcoin dominance dropped back to levels last seen in April 2019. The price (BTC/USD) of the first cryptocurrency declined to its early March levels. Meanwhile, the price of Ether (ETH/USD) reached a new high at $2645 yesterday, boosted by the success of the new ETH2 protocol development, and more recently by the launch of the first Ether ETFs by Purpose Investments and Evolve on the Toronto Stock Exchange. Two days after their launch, both ETFs already account together for $44M of assets under management (AUM).
Eventually the falling price of Bitcoin amid bearish rumours over the US tax policy led to the worst cryptocurrency market decline since February. Bloomberg reported that the Biden administration would seek to ‘almost double the capital gains tax to 39.6% to help pay for a raft of social spending that addresses long-standing inequality’ and ‘enhance the estate tax for the wealthy’. The announcement did also weigh on the Equity market as the S&P500 index dropped by 0.92%. Bitcoin lost nearly 8.5% in the past two days, and it is down by more than 24% from its all-time-high recorded 9 days ago. The crash is comparable to the 27% correction seen during the last week of February. Although it is far from unusual for Bitcoin to have such corrections, it is the second serious test of resilience for the many institutions that decided to enter the market in Q4 last year.
The impact of the tax policy announcement was amplified by social networks spreading the rumour of an 80% capital tax gains on cryptocurrency trading in the US proposed by Janet Yellen.
Panic took over even though the fundamental ‘exchange’ and ‘on-chain’ metrics have rarely been more bullish. The all-exchange BTC reserves reported by CryptoQuant dropped 3 days ago to a new low with 2.13M BTCs held on exchanges. A net amount of 63,237 BTCs was moved out from the exchanges last Sunday, and another 40,558 BTCs were moved out the next day. Yesterday’s markets drop only saw a net 10,889 BTCs moved into the exchanges. The miners flow to exchanges is also relatively still low.
However, the Saturday correction started with a transfer of 9,000 BTCs to Binance. The transfer came along with a power outage in Xinjiang, a Chinese region with a large presence of cryptocurrency miners. The series of events triggered speculation over the reasons behind both the outage and the transfer. The most pessimistic observers would argue then that the Bitcoin network had been compromised as the hashrate had almost halved.
As explained by blockchain.com, the hashrate is the number of terahashes per second that the network is performing, it is a measure of the power used to mine and process transactions: ‘The more hashing (computing) power in the network, the greater its security and its overall resistance to attack’.
Following the outage, the high leverage accumulated on derivative instruments exacerbated the severity of the market crash. At least $9.26 billion worth of long contracts were liquidated according to Bybt: a new all-time-high. Future contracts on Bitmex were oversold, and their value dropped $665 below the BTC/USD spot price.
At the time of this article, the Bitcoin price is trying to bounce back from this ‘incident’. If it fails to hold around these levels, it might be heading for a severe correction towards $35,000. However, given the strength of its fundamentals and the growing HODlers community, it is more likely at this stage to see the Bitcoin price recover.
Regardless of the severity of the market correction, and the severity of the future corrections to come, HODLers are now more disciplined that ever. They will most likely perceive any correction as one more temporary setback. Despite the doubts over the US cryptocurrency tax policy, or the doubts over the integrity of the Bitcoin network, only time can bring us comfort that Bitcoin is here to stay. Banning cryptocurrencies as Turkey did this week, or overtaxing capital gains would not change much to the fundamental trend of Bitcoin adoption worldwide. HODLers would argue that they have seen much worse… As SEC commissioner Hester Peirce said ten days ago when asked about the risk of a US government ban on Bitcoin: ‘I think we were past that point very early on because you would have to shut down the internet’.