Cryptocurrency market bloodbath: 5 risk factors and whys

The bloodbath in the cryptocurrency market has continued apace this afternoon with nearly all the major coins suffering double-digit selloffs, as investors hoping for a bounce-back from a Sunday flash crash were severely disappointed.

Bitcoin (BTC) has plunged below the psychological US $50,000 level on Friday by shedding around 13% to hover just over US $47,000 while Ethereum (ETH) is down 13%, ripple (XRP) 21%, Binance Coin (BNB) 14%, cardano (ADA) 16%, ChainLink (Link) down 15%, Dogecoin (DOGE) 12%, Stellar (XLM) 17%, Litecoin (LTC) 18%, Vechain (VET) 23 and Bitcoin Cash 18%.

Interestingly, early this morning the crypto currency market appeared to be recovering from Sunday’s flash crash, with the second-largest cryptocurrency Ether hit new high above US $2,600.

The subsequent losses for bitcoin over the past week represent around a 27% drop from a recent peak of $64,829 for the world’s biggest cryptocurrency.

A 10-20% sustained retreat is usually defined by the market watchers as a correction (unlike a regular fluctuation or swing ), and a double-digit market-wide contraction would amount to a bloodbath.

These are 5 market-sensitive events that had happened over the past week, causing a sharp U-turn in the multi-month relative uptrend.

  1. News reports about U.S. President Joe Biden will roll out a big tax hike, including almost doubling the capital gains tax on people earning over US $1 million. In the U.S., a capital gains tax applies to only profits realized from the sale of assets held for more than 12 months, referred to as “long-term capital gains.” The current rates are 0%, 15%, or 20%, depending on your tax bracket. President Biden’s tax hike would subject the top earners to around 40% tax. As a result, U.S. residents who have invested in the digital assets  since last year now face a massive tax when they sell their 1-year old (matured) cryptocurrency holdings given the prices have surged significantly over the one year period. This may have triggered a panic where many US residents rush to dispose of their holdings earlier or other market participants expect U.S. residents to do so (in either case, it would cause sell-off).
  2. Turkish prosecutors have opened an investigation after the Istanbul-based founder of a cryptocurrency exchange Thodex shut down his site and fled the country with a reported US $2 billion in crypto coin investors’ assets. Local media reports said  Faruk Fatih Ozer  had flown either to Albania or Thailand after he faced pressure from investors whom he lured to buy Dogecoins in large amounts but didnt allow them to sell when the coin started to plunge.
  3. Last Sunday, a flash crash in the crypto market was attributed to online reports about speculation that the U.S. Treasury is preparing to crack down on international money laundering carried out digitally through cryptocurrencies. There was also a talk about the possible implications, such as sanctions on some financial institutions or stricter regulatory approach by governments towards cryptocurrency trading especially if the U.S. makes the first move.
  4. Turkey announced a ban on on the use of cryptocurrencies as rapid depreciation of the local currency lira and double-digit inflation had made cryptocurrencies a hedge and a safe haven in the country. Turkish investors had reportedly invested in cryptocurrencies significantly over the past 2 years. The ban and U.S. news also raised the concerns about the vulnerability of cryptocurrencies to possible government regulations in the future.
  5. After significant gains in March and early April, a market correction has been looking increasing likely in the weeks ahead as many of the digital coins began to test their upside price targets, in which cases, usually traders prepare to take some profits off the table. Besides weak market seasonality in upcoming May, the current put/calls ratio in the stock market has been signaling a sense of complacency among investors, a sign that is typically seen near market tops.
    Furthermore, unless you’ve been living under a rock, you have heard of “Sell in May and Go Away”  –  an old stock market adage backed by surprisingly robust historical data, especially in Europe where market activity slows down due to upcoming summer and holidays. Historical data show that overall market returns in many countries during the May-October period are systematically negative or lower than the short-term interest rate. The effect has been strongly present and consistent in most developed markets (including Australia, the United States, Canada, Japan, the United Kingdom and most European countries). As a result, many experienced investors try to offload their holdings after mid-April to preempt the expected retreat.

There have also been other relevant developments which unlikely pose a significant risk, but would add to the subdued sentiment.

For example, Australian computer businessman Craig Wright who claims he created bitcoin is taking legal action in the United Kingdom, which could force the court to rule on whether he is indeed the cryptocurrency’s inventor.

The case hinges on who wrote bitcoin’s white paper, which first outlined the technology behind the digital currency, under the pseudonym Satoshi Nakamoto in 2008.

His claim is not something new as the identity of Nakamoto has long been a hot topic and there have been many claimed candidates.

Security researcher Dan Kaminsky said in his blog that Wright’s claim was a scam and bitcoin developer Jeff Garzik agreed that evidence publicly provided by Wright does not prove anything. Jordan Pearson and Lorenzo Franceschi-Bicchierai said that, “Wright simply reused an old signature from a bitcoin transaction performed in 2009 by Satoshi.”

In 2004, Wright was convicted of contempt of court by the Supreme Court of New South Wales. He was sentenced to 28 days in jail for breaching an injunction that prevented him from approaching customers of DeMorgan Information Security Systems, from which he resigned in 2003. The sentence was suspended on condition of performing 250 hours of community service. After appealing the decision, the ruling was upheld in 2005 and also in a subsequent appeal to the High Court of Australia in 2006.

In 2015, Wright was investigated by the Australian Taxation Office (ATO) over his involvement with bitcoin and his Sydney home was raided by the Australian federal police.

In 2016, Wright claimed he was Nakamoto, but experts questioned the evidence he provided. He promised to provide further proof, but backed down days later, saying he was “sorry” and did “not have the courage”.

 

 

 

Risk Warning: Cryptocurrency is a unregulated virtual notoriously volatile asset with a high level of risk.  Any news, opinions, research, data, or other information contained within this website is provided for news reporting purposes as general market commentary and does not constitute investment or trading advice.