During the month of May 2021, Bitcoin and Ethereum, the main currencies according to market capitalization, suffered a significant fall, which for some moments exceeded more than 50% of their peak price (All time High). BTC dropped from $62,000 to $30,000 and Ethereum from $4,200 to $1,800 in just a couple of days. There are various theories about the reasons for this capitulation. Here is an analysis of the factors that I consider most relevant.
Elon Musk made his brand new entry into the crypto market with the purchase, by his electric car company Tesla, of more than a billion dollars in Bitcoin and a series of tweets praising the Dogecoin cryptocurrency. These actions and comments from the second richest man in the world (only behind Jeff Bezos), had a great impact on the market. However, that same positive impact was reversed when Elon decided to make a string of negative comments about the ecological impact of Bitcoin mining and toyed with the idea of selling all of his newly bought Bitcoins (which he later denied and admitted that Tesla has only sold 10% of their BTC and did so as a test of market liquidity). (Elon Musk's Twitter).
The Chinese government has decided to tighten restrictions on companies that operate cryptocurrencies in their country. The measures are primarily aimed at financial institutions operating cryptocurrencies, individuals conducting initial coin offerings (ICOs) and cryptocurrency miners. It is worth noting that it is not the first time that the Chinese government has tried to reject the use of cryptocurrencies in its country, the measures taken are a continuation of a series of restrictions that date from before 2017. As a consequence of the continuous threats and persecutions to crypto companies in China, many have decided to move their operations to other countries. It should be noted that the Chinese government's restrictions are aimed at registered companies, since as we all know it is very complex to prevent the domestic use of cryptocurrencies. However, the news that transpired in most of the media generated great confusion and panic in the market.
Panic Selling. Elon Musk's unfortunate tweets, together with the confusing news from the East, generated something that is known in the financial markets as Fear Uncertainty and Doubt (FUD), that is, Fear, Uncertainty and Doubts; which triggered a wave of sales in the market motivated by panic.
Collapse of financial leverage. The aforementioned panic selling initiated a series of liquidations of leveraged positions, leading to increased selling pressure in the market. A leveraged position is, broadly speaking, when an investor borrows money to buy an asset (in this case Bitcoin, Ethereum and other cryptocurrencies), waits for the price of the asset to rise and sells it to repay his loan, keeping the difference as profit. However, when the asset does not rise in price, the investor must sell the cryptocurrency he bought to repay the loan and in the worst case, his position is "liquidated" by the system, which sells his assets and collects the loan automatically. (For more information on how financial leverage works you can visit the Binance Academy).
Now, whenever there is a big crash in the crypto market like the one we experienced I believe it is important to focus our analysis on the most relevant currency by market capitalization and volume (most of the time): Bitcoin, since a good recovery of BTC would categorically boost the entire crypto market.
In the graph shown below, we can see how Bitcoin has found an important support level in the price range of $30,000- $32,000, in which it has bounced strongly twice after the crash (these points are marked by the red circles) . This simply means that investors are willing to buy Bitcoin at those prices.
Today (27-05-21), Bitcoin oscillates in the range of $38,000- $40,000 (green circle), After a fall as strong as the one we saw this month, a consolidation period is to be expected, in which an asset finds a new price band while investors decide between: buying again, selling or hodling their positions.
While the near future is uncertain, the medium and long-term prospects remain intact as demand continues to grow and many investors are taking this drop as an opportunity to buy Bitcoin at a good entry price. An example of this is billionaire Carl Icahn who has declared his interest in buying more than $ 1 billion worth of Bitcoin.
What to do?
Well I am actually not going to tell you what to do, like Ivan on Tech always says:
“You do you, I do me.”
However, I am going to share my “downtrend” strategy which is aimed at minimizing losses while staying with a position in the crypto market.
My portfolio structuring is focused on medium and long-term convictions. The assets that make up the portfolio have good “fundamentals”, that is, they are consolidated currencies with good market capitalization (BTC, ETH, EOS, BNB, DOT) or tokens that support projects that generate great interest in the market and are led by competent teams with already secured resources in previous investment rounds (RARI, LRC, BAND, KNC, BAL).
At the same time, I believe it is important to maintain more than 50% of the portfolio’s assets in “liquidity pools” composed of Crypto/Stable pairs, these assets not only generate yield but are also less volatile (reverse impermanent loss anyone?). This strategy has served as a crucial instrument to offset the decline in the cryptocurrency market.
Good luck out there!