Cryptocurrency investors woke up to a nasty surprise on the morning of Wednesday, May 19, 2021. The price of Bitcoin had plummeted over 40% from its all-time highs and went as low as $38,704 CAD at one point, dragging every Altcoin down with it.
Anyone who began their cryptocurrency investment journey this year watched their portfolio gains get wiped out in minutes. Long-time investors were still ahead but undoubtedly disappointed to lose almost all this year’s upside as the price dropped to January/February 2021 levels. However, the dip was short-lived, and 24 hours later, Bitcoin had recovered nearly 20%.
If you pay attention to cryptocurrency markets, you would have noticed that Bitcoin exhibited a downward trend since the start of May, but some key events pushed its price down from “normal price swings” and into decidedly “crash” territory. Extreme volatility is the nature of cryptocurrency, but this pullback was the largest we’ve had during this bull run.
So, what the heck happened? Why is the Bitcoin price crashing? And should Bitcoin and crypto investors be concerned? I’ve got the answers that you’re looking for.
Elon Musk tweets about Bitcoin and sends it plummeting
Elon Musk, a vocal advocate and investor in cryptocurrency, tweeted on May 12, 2021, that Tesla would no longer be accepting Bitcoin as a form of payment for its cars.
Tesla & Bitcoin pic.twitter.com/YSswJmVZhP
— Elon Musk (@elonmusk) May 12, 2021
This tweet sent the price of Bitcoin plunging more than 8%. This tumble was unjustified: even at $2 billion dollars, Tesla’s stake in Bitcoin represented only 0.23% of the cryptocurrency’s total market cap. There is no reason for Elon’s tweets to move crypto markets, but as one of the richest men in the world and a recognized tech leader, many of cryptocurrency’s most ardent fans see Musk as an authority figure.
It’s not the first time Musk has moved the crypto market. Over the past few months, his tweets have had dramatic negative and positive effects on cryptocurrency prices.
In February, Tesla took a $1.5 billion dollar stake in Bitcoin. The move sent the cryptocurrency soaring 20% the following day. Over the following 3 months, Tesla’s position in Bitcoin swelled to $2 Billion dollars. Musk had made more from holding Bitcoin than selling electric cars!
When Musk changed his tune in May — citing his concern for the environmental impact of Bitcoin as the reason Tesla would no longer be accepting Bitcoin as a form of payment—the crypto value tumbled.
However, Musk insisted Tesla would not be selling any of their Bitcoin. Instead, he’s looking into Altcoins that use less than 1% of the energy that Bitcoin requires. Weirdly, the negative environmental consequences of mining and using cryptocurrency have always been known. Many socially responsible investors steer clear of Bitcoin for exactly this reason.
It’s unlikely Musk was clueless of the energy demands of Bitcoin transactions when Tesla initiated its billion-dollar position. Why Musk—an engineer and technology CEO who has been advocating for cryptocurrency for a decade—is pretending to only be learning the very basics of Bitcoin transactions is unknown.
While Musk’s tweets will likely continue to move crypto markets, there are larger global forces, too. And these have proven to be even more significant than a billionaire’s social media account.
China’s crypto warning
Elon Musk’s tweets shook the crypto markets, but they weren’t the reason behind Bitcoin’s crash this month. This time, the culprit was China — a country that’s been trying to ban cryptocurrencies since their debut. On Wednesday, May 19, China announced that financial institutions and payment providers are banned from conducting business in digital currencies.
This is not the first time the country has cracked down on crypto. In 2017, China banned both cryptocurrency mining and cryptocurrency exchange platforms, forcing miners abroad. In fact, many long-term crypto investors routinely joke that China attempts to sanction cryptocurrency at least once every bull run.
China is not actually against digital currency or blockchain technology. In fact, they are working to digitize their own national currency —the yuan — into a digital token of its own. In fact, most expect we are headed towards a cashless society, where every nation has its own digital currency.
The real reason why China and many other countries feel threatened by Bitcoin and crypto is a lack of control. The nature of Bitcoin and crypto itself is decentralized finance — a monetary system independent of any one nation’s economy or government. While this is an exciting innovation that creates a global currency, where the power is literally in the hands of the people, the end result is national governments exert less control over citizens’ finances. And that ultimately leads to loss of income tax revenue and devaluation of their local currencies.
The 4-year market cycle for Bitcoin
While still a newish asset, Bitcoin now has decade-long price history we can analyze for patterns and cycles. Bitcoin tends to move in a 4-year market cycle, defined by halving events.
Bitcoin “halving” (sometimes called “halvening”) is when the number of Bitcoin a miner is rewarded with for completing a block is half its previous value. When Bitcoin first appeared in 2009, miners used to unlock 50 Bitcoin per block. In 2012, at the first halving event, that number dropped to 25. In 2016, it halved again to 12.5 and in 2020, once more to 6.25 BTC earned per new block mined.
Bitcoin tends to see a huge price run-up after a halving event, followed by a correction. That’s why we saw massive price surges in Bitcoin’s value in 2017 and the latter half of 2020 and early 2021. Each run-up in price was followed by a dramatic pull-back. Sometimes Bitcoin has lost as much as 80% off its previous high.
What we have just experienced is a natural and expected pull-back on the price of Bitcoin and cryptocurrencies in its market cycle. While these price cycles are uncomfortable to endure, it’s part of investing. Instead of panicking over a dip and wondering if it’s the “end of cryptocurrency,” see it as a chance to buy in at a lower price and enjoy bigger gains in the future. It’s like Bitcoin is on sale!
Is this a start of a cryptocurrency winter?
After a “bubble burst,” we typically see a crypto winter that lasts 2 to 3 years, where prices of Bitcoin and other cryptocurrencies remain low. During a crypto winter, most retail investors are disenchanted with cryptocurrency and stay away from it due to lack of returns or because they were burned by the previous crash. This is what we saw following the previous crypto fallout in 2018.
Some bullish cryptocurrency investors say there will be no crypto winter this time around because the nature of investing in Bitcoin has changed. More investors than ever have bought into Bitcoin, Ether, and Altcoins, and the debut of cryptocurrency ETFs on the stock exchange allowed institutional investors to take positions in digital currency. You can even buy the Bitcoin ETF in your TFSA or RRSP. In general, Bitcoin and cryptocurrency remain volatile and speculative investments, but they’re now recognized as legitimate assets.
Now the cryptocurrency investing space is occupied by experienced traders who aren’t spooked by volatility. Instead, they see dramatic price drops as buying opportunities. Those who were previously calling Bitcoin overpriced and overvalued, now see it as a more reasonable investment and are buying in at its reduced price. This is likely why we saw a swift and significant recovery in Bitcoin’s price within 24 hours of its fall. However, it’s unclear if and how long this recovery will last, and a future downturn is likely.
More volatility ahead for Bitcoin
It’s impossible to predict Bitcoin’s next move, but cryptocurrency is here to stay. The prices of Bitcoin, Ether, and Altcoins will continue to fluctuate in response to investor sentiment, national governments, and yes, even Elon Musk’s tweets. If you recognize the long-term potential of cryptocurrency, then you should not be deterred by its short-term volatility. You should, however, expect it.
Digital currency is the future of money, but there will be plenty of growing pains along the way. Your best bet is to diversify your investments and take a long-term perspective — the same approach to buying stock on the traditional stock market. Like with most investments, the thing most likely to bring a positive return is not timing the market, but time in the market.