Bitcoin Crushed As Holders Worried About Never Seeing These Prices Again

The decline continued even as major financial players warmed to cryptocurrencies.

Black rock

(ticker: BLK), the world’s largest asset manager, for example, allows two of its funds to invest in Bitcoin futures, according to prospectuses filed with the Securities and Exchange Commission on Wednesday.

And Sequoia, a Virginia-based software and engineering company, offers employees the option of being paid in Bitcoin. (This could create tax headaches for employees who actually want to spend their paychecks, given that after having already paid income taxes, they would have to pay more tax based on any change in value. of Bitcoin.)

None of these positive announcements appear to have increased the price of Bitcoin. As always, it’s hard to pinpoint exactly why the digital asset is on the move. Janet Yellen, the candidate for Treasury secretary in the Biden administration, mentioned the crime and fraud risks that Bitcoin presents in a hearing, but the pressure to sell did not really coincide with her comments. .

The stock market can also move in bewildering ways, hitting seemingly good news and vice versa. But this type of wild unexplained swing is much more common in Bitcoin, which still largely trades on lightly regulated exchanges or fast-moving foreign futures markets.

Over the past few weeks, Bitcoin has generally been weaker when it is daylight in Asia and stronger when it is daylight in the United States. This reflects a division of enthusiasm in these two parts of the world, both critical of Bitcoin prices.

Bitcoin may be an international asset, but it trades differently and faces different regulations by jurisdiction, so changes in local sentiment can affect prices even if the market as a whole is bullish.

“There have been significant net inflows to North America from East Asia,” said Philip Gradwell, chief economist of Chainalysis, a company that has mapped the Bitcoin ecosystem around the world and can follow the movements of cryptocurrencies in real time.

To understand Bitcoin, it is necessary to grasp the differences in local sentiment, which may mean that U.S. Bitcoin holders wake up 10% poorer than they were when they fell asleep.

“The North American ecosystem around cryptocurrencies has matured tremendously compared to 2017, and cryptocurrencies have also become a bit more difficult to use in East Asia,” Gradwell said. “There is still a lot of cryptocurrency owned by Chinese nationals, but there is a little more pressure on the exchanges which tend to serve them. Technically, they are still not allowed to operate on the mainland. They do, but there has been kind of a bit more repression. In addition, you are less interested in Japan and South Korea than in 2017. People who bought Bitcoin at the time were willing to sell it. “

So even though Asian investors are bullish on Bitcoin, they have an incentive to sell if they are worried about their ability to cash in in the face of stricter government rules.

Gradwell says the 600% increase in Bitcoin in 2020 has a lot to do with supply and demand. Large investors bought a huge amount of Bitcoin between March and June, with a record number of purchases worth at least $ 1 million, 84% more than what was bought in the race. bullish of 2017. Some of these investors say they bought Bitcoin because they are increasingly nervous about inflation in the United States, given that the government has spent so much on stimulus efforts.

Bitcoin’s supply is limited, with only 6.25 new Bitcoin – or roughly $ 200,000 at current prices – created about every 10 minutes. So when big investors enter the market, they have to find willing sellers and may have to pay for the privilege of buying it.

Theoretically, steadily increasing demand would simply continue to push the price up given the limits of supply. But Bitcoin is a dynamic trade that can turn around quickly. When the price starts to drop, there is often a rush to exit, as sellers fear, as in 2017, that they will not be able to sell at these prices for a while.

“What’s interesting is that when demand suddenly drops, there’s always a rush to sell,” Gradwell said. “Because people say, ‘OK, I don’t know when the price will come back to that level.'”

He says there is evidence that recent Bitcoin holders are increasingly willing to sell over the past two weeks. “In the last week or so, the number of moving Bitcoins that have been held for less than a month but made 25% or more in dollar gains has reached pretty high levels. So there are a lot of people who have bought Bitcoin recently, they have done very well thanks to the price increase and they are starting to move it. And when they move it, it’s to sell. It is starting to put pressure. “

Traders may be starting to point out how much Bitcoin has been driven by the hype and FOMO – the ‘fear of missing something’.

Bank of America

released a global survey this week showing customers believe Bitcoin is now the most crowded trade in the market, even more so than tech stocks.

These technical and sentimental issues can make it difficult to trade Bitcoin based on daily industry news. Momentum, market dynamics and regional changes often explain things better.

“This is one of the markets where technical analysis traders do quite well, which economists like me get a little bit flustered with,” Gradwell said. “So I try not to explain these strong price fluctuations. I actually think there is a real demand and supply mechanism and it’s kind of that simple.

Write to Avi Salzman at avi.salzman@barrons.com