Why Bitcoin just Plummeted

Bitcoin prices plummeted dramatically yesterday, underscoring for investors the persistent potential for extreme volatility. While the dip might appear sudden, it was precipitated by a combination of events that contributed to the decline.

Low Volumes and Volatility have led to a market vulnerable to larger trades

In recent months, volatility has decreased, reaching levels comparable to the all-time lows observed at the start of the year. Historically, such levels have often marked turning points for significant price swings, either upward or downward.

Additionally, Bitcoin trading volumes have been notably subdued, possibly influenced by seasonal factors. They averaged US$2.3bn per day, compared to US$2.8bn the previous week on trusted exchanges. This is significantly lower than the yearly average of US$7bn and the 2022 daily average of US$11bn.

Regulatory Actions

Recent price declines can be partly attributed to the SEC’s stringent measures on US crypto exchanges, resulting in a marked drop in trading volumes, especially for stablecoins. Paradoxically, the depreciating US dollar over the past year might have intensified this trend. This is due to diminished interest from investors in holding dollar-pegged stablecoins. The market share of dollar-denominated stablecoins has dwindled from 70% to a mere 50% today.

The surge in June, spurred by BlackRock’s application for SEC approval of a Bitcoin ETF, led to a noticeable spike in prices. However, markets are now coming to terms with the realisation that an immediate SEC approval for a Bitcoin ETF in the US is unlikely. It’s noteworthy that current Bitcoin prices have stabilised around levels observed before this announcement.

From our latest fund manager survey, we understand that investors are highly attuned to regulatory decisions, ranking it as their key concern. This will likely continue to be a pressing issue until there’s clear regulation for a spot Bitcoin ETF and a well-established regulatory framework for digital assets in the US, akin to MiCa in Europe.

Concerns over China

Over the last two years, China’s property sector has been ensnared in a deepening debt crisis, precipitated by the government’s efforts to curb skyrocketing debt. Numerous developers have defaulted on payments, grappling with challenges in selling apartments and securing financing. While stimulus measures provide some relief, they can’t fully counteract the intensifying structural deceleration of the economy. Although this scenario may not culminate in a full-blown economic crash, it’s poised to continually hamper economic growth, given the property sector’s pivotal role (constituting 25% of the economy) in driving growth over previous decades.

The economic horizon appears bleak. Last month, bank loans plummeted to their lowest in 14 years, deflation is gaining ground, and exports are in decline. One of China’s preeminent property developers teeters on the brink of default. Moreover, a financial conglomerate, overseeing 1 trillion yuan (US$138 billion) in assets, failed to meet payments on investment products, igniting concerns over potential contagion. While we consider a full financial meltdown unlikely, should it transpire, it might bolster Bitcoin, especially if the repercussions permeate the broader financial sector.

The Bitcoin price maybe indicative for a potential crash in other asset classes.

10-year US treasuries recently hit their highest level in 16 years while many leading economic indicators suggest economic growth globally is looking shaky. Bitcoin has often been the first to act in recent years, so this may be indicative of a broader crash in other asset classes. The bond markets have been persistent in their worries over economic growth, as indicated by the 10–2 yield curve.

Futures Positioning

Recent data from a diverse range of exchanges indicates a net long positioning for Bitcoin in the futures market over the past few months. This prolonged stability might have bred a sense of complacency among investors. However, a significant unwinding of these positions occurred last night, amplifying the decline in prices. Current sentiment remains bearish, as evidenced by the negative funding rates which suggest traders’ inclination to short.

Elon Musk

In another development, SpaceX reported a markdown of US$373m in its Bitcoin holdings yesterday. History shows that the market often reacts sharply to Elon Musk’s actions, implying that this latest revelation could further dampen investor sentiment.

The outlook for the markets in the forthcoming months presents a blend of opportunities and challenges. It’s anticipated that the US Federal Reserve will refrain from hiking rates further in September. Insights into their stance will be clearer during the Jackson Hole Economic Policy Symposium scheduled for 24th-26th August. A dovish shift is expected, which could bolster Bitcoin’s prospects. On the flip side, investors are eagerly awaiting the SEC’s verdict on the Grayscale ETF and Blackrock applications in September. Anticipations are that decisions on both applications might be postponed, potentially leading to investor disappointment.

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