Bitcoin has experienced a significant drop in price over the last couple of months. In April, the leading crypto reached new highs of about $65,000. Its price has now more than halved, tumbling down to under $30,000 in just two months.
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The stock market and cryptocurrencies like Bitcoin surged in price during the pandemic as thousands of dollars were given to individuals in the form of stimulus checks. While many used this money for necessities, others used it to invest. Prices of all asset types pumped to new all-time highs.
In the last year, we've seen numerous corporate entities like MicroStrategy and Tesla purchase Bitcoin, and more recently, we saw the first country formally recognize Bitcoin as legal tender. Bitcoin also experienced its halving event in May of 2020, effectively cutting the freshly minted Bitcoin entering circulation in half.
So if Bitcoin is more scarce and large companies and countries are beginning to adopt it, why is the price falling?
The initial whiff of uncertainty in the crypto markets came from Elon Musk's flip-flopping of opinion on Bitcoin. Over the years, Musk has shared his view on Bitcoin and crypto several times. His outlook has generally been positive, but his position as such an influential figure can sway the opinion of investors with ease.
One of the best examples of Musk's unpredictability was when he infamously said "Tesla stock price is too high imo."
Tesla's stock price subsequently tumbled nearly 22% on the day. Musk's actions on Twitter have gotten him in trouble too. In 2018 he reached an agreement with the SEC to step down as Tesla's chairman and that he would need to have a lawyer approve any statements he wished to make that had any material information about the company. Unfortunately, this rule didn't apply to the crypto markets.
Musk's first public thoughts on Bitcoin came during a podcast with Cathie wood of Ark Invest. Musk said that "paper money is going away and crypto is a far better way to transfer value than pieces of paper."
Initially, many thought this was great for Bitcoin. Here is one of the richest men on the globe who is focused on the future of tech showing support for cryptocurrency.
Then, in December of 2020, Musk announced that Tesla would be buying $1.5 billion worth of Bitcoin to hold on its balance sheet. The company took it one step further and said they would begin accepting Bitcoin for its cars too.
This was perhaps the most significant news that had ever occurred in the crypto community. The man behind companies like PayPal, Tesla and SpaceX showed support for Bitcoin and even had one of his companies purchase it propelling the price to $40,000 in short order.
But then the narrative changed. In another unexpected move, Musk announced that Tesla would cease to accept Bitcoin for its cars as they claimed the process of mining was too energy-intensive. Even though he said in the announcement that the company would continue to hold its Bitcoin, fear spread through the market.
On that day Bitcoin dropped as much as 13% as people began to speculate that Tesla would soon sell the Bitcoin it held too. Fear grew, anger at Musk grew, and the first indication of an unhealthy market started to reveal itself.
Musk and Tesla's move to stop accepting Bitcoin resparked the age-old energy debate about the mining of Bitcoin. Bitcoin uses the Proof-of-work consensus mechanism to secure its network. This requires immense amounts of power but is designed this way to make it harder for the network to be attacked.
An attacker would need more than 50% of the collective mining power to successfully do anything. Even then, the rest of the network participants could simply fork to a new chain, rendering the initial attack useless.
The cumulative energy used by the Bitcoin network is near the size of entire countries like Sweden or Argentina. Many find this concerning and wasteful. In a recent Congressional hearing, Senator Elizabeth Warren said there should be a crackdown on wasteful cryptocurrencies.
"Bitcoin requires so much computing activity that it eats up more energy than entire countries. One of the easiest and least disruptive things we can do to fight the climate crisis is to crackdown on environmentally wasteful cryptocurrencies."
It's clear that Bitcoin uses enormous levels of power, but an often overlooked metric is the type of energy used. A study done by the University of Cambridge in 2020 showed that nearly 40% of the total power used by Bitcoin miners was renewable energy, with hydroelectric being the number one source of energy for all miners.
A report by Galaxy Digital estimates that the Bitcoin network uses approximately 113 TWh/yr (Terawatt-hours per year). In comparison, the gold industry makes up 240 TWh/yr and the banking industry uses an estimated 263 TWh/yr. Proponents of Bitcoin contend that the banking and gold industry is no longer necessary now that we have Bitcoin and that it is those two industries that are wasteful.
Renewable energy is also getting more affordable and could drop below fossil fuels in price, making it the more sought-after option for mining. According to Our World in Data, the cost of solar energy decreased by 89% from 2009 to 2019.
The confusion around Bitcoin's energy use has led many to reconsider their investments and potentially search for more environmental alternatives. The rise of ESG (environmental, social, and governance) investing has also exploded in recent years, leading to more eco-friendly investors and investment vehicles, potentially pushing some away from Bitcoin when they hear that it uses the energy equivalent to entire nations.
Tribalism and Fractured Communities
The reality of cryptocurrency is that it is an industry made up of open-source software. This means that the code for all of these projects is free to be copied, renamed or repurposed by anyone who chooses to do so. This can include people with nefarious intentions who are looking to pull off pump and dump schemes. Today, we have a digital asset market made up of over 10,000 cryptocurrencies all claiming some new type of utility, faster transactions or more security.
Right now, there are at least eight versions of Bitcoin called things like Bitcoin SV, Bitcoin Cash or Bitcoin Gold. Beyond Bitcoin, there are thousands of cryptocurencies all with their own communities that believe their coin is the future of payments.
At its peak, the cryptocurrency market had a capitalization of $2.4 trillion divided among all these projects. Now, the total market cap has dropped in half down to $1.26 trillion in just a couple of months. Bitcoin's share of this market capitalization has also decreased over time as new coins are created and more money gets spread across them. The amount of Bitcoin lookalikes, copycat coins, and bold promises by projects leads to confusion and a division of capital.
Bitcoin was created after the 2008 financial collapse led to mistrust of the banking system. Its purpose was simple — build a system where people did not need to rely on banks to store and move money. It also provided a solution for unbanked populations in 2nd and 3rd world countries or those living in oppressive regimes.
With the division of investors' money allocated to so many different projects, the sense of Bitcoin's initial purpose of making a new monetary system feels lost. Rather than a movement with a collective vision of individual sovereignty and financial inclusivity, people are focused on their particular investments with their own goals. It has led to fractured communities, infighting and a lack of solidarity. This division of capital and opinion may make it harder for the crypto market to weather volatility as a whole, leading to deeper sell-offs.
Greed & Speculation
Another factor that has likely contributed to the recent plunge in the markets is the amount of speculation and greed going on. Speculation on new projects with low prices further divides capital and draws strength away from more serious projects. This has been further fueled by the age of the Robinhood trader and the recent stimulus cash infusion that everyone received.
The rise of meme stocks and cryptocurrencies like GameStop, AMC, Dogecoin and more has created a lot of lucky wealth. This has the ability to lure people in. While some people invest in alternative cryptocurrencies after research, others invest with the hope of a moonshot and becoming rich.
In each cryptocurrency bull market, there is a flurry of new coins created. This time meme coins like Shiba Inu, Safemoon, Cumrocket, Elongate and others grew extensive popularity on social media. These coins have no discernable utility or function other than to play on memes and follow trends.
The hashtag "Doge to the $1" has trended several times this year while the coin has a quantity of 130 billion and an ever-growing supply. A $1.00 doge would require a market cap of $130 billion, making it larger than many significant companies. Some of the coins above even have a quadrillion units of supply and entice investors due to the low price of a single unit compared to Bitcoin.
Just like tribalism, greed and speculation divides up capital and helps to undermine the initial purpose that Bitcoin and other leading cryptocurrencies hope to fulfill.
China's Mining Crackdown
The sell-off can also be attributed to the constant threat of negative regulation in China. News of a crypto ban in China has happened on seemingly countless occasions throughout the history of the market.
Each time this news is circulated a drop in Bitcoin's price follows. So far, however, these threats have been almost entirely immaterial and have been insignificant though they seem to have a great effect on the markets.
In 2013 China issued a notice that it would ban banks from handling Bitcoin transactions. Later in 2017, China ordered cryptocurrency exchanges to close. In 2019 the country issued a warning to miners that eventually amounted to nothing. With each piece of news out of China the price of Bitcoin drops, only to march back to a new all-time high some time later.
Now China has announced a more formal ban on cryptocurrency transactions, leading to the exodus of many miners from China. The country still has yet to formally ban mining, but the countries actions over the years make it clear it isn't too fond of crypto.
While there seems to be little substance to the countries new notice, the market has reacted strongly, just as it has in the past to such news.
A Toxic Marketplace
Confusion about how cryptocurrency even works, greed while searching for the next moonshot and anger at rival cryptocurrencies seems more rampant than ever.
Tribes have formed that call one crypto project a scam while touting their own as the cure-all money of the future. Along the way, the vision, intent and purpose of Bitcoin has become obscured.
Some of this could be attributed to larger influencers like Elon Musk making assertions that are generally not in line with the statistics, leading to fear in the market. Some could be considered a result of a fear of regulation. Perhaps the most likely cause of the insecurity and volatility in the marketplace is a lack of education.
A survey done in March of 2021 found that just 16.9% of crypto investors actually understand the asset they were buying. The study found that 83% of investors had little to no knowledge of how cryptocurrency worked and yet they were still invested.
Ironically, 41% of investors claimed that their motive for investing was for long-term portfolio growth. While they claimed a long-term strategy, the investors said they intend to hold the assets for fewer than 12 months.
The demographics suggest that the average crypto investor is uneducated in regard to cryptocurrencies and is seeking short-term gains. The result is a speculative marketplace comprised of inexperienced investors who typically exit markets in times of uncertainty.
Taking into consideration the nature of the crypto market in its current state, it's easy to see why it's so volatile and why the market can take such large hits.
Going forward, a healthier market will require better education among the public and a better understanding of what purpose cryptocurrencies actually serve in the global financial ecosystem. While there will always be speculation and a desire to land that moonshot coin, a better-educated population is less likely to react to inconsequential news.