25May 2021

Our View on Recent Volatility

by Matthew Harcourt

Over the past two weeks there has been immense volatility in the crypto markets with Bitcoin and Ethereum correcting -50% and -61% peak-to-trough respectively since the 10th of May. While long term crypto asset investors are no strangers to major corrections, this market wide sell off was particularly brutal. In this article we will outline the major news stories that contributed to the market panic and discuss whether these developments will have a lasting impact on the fundamentals of the asset class.

Before we dig into the news events that contributed to the recent volatility, it is worth pointing out that crypto markets were in need of a correction. Crypto markets operate with a significant amount of leverage due to the fact that retail investors are able to access 50-100 times leverage instantly through centralised exchanges such as ByBit, Binance and FTX. In this bull cycle, these exchanges have branched out into offering leverage on a wider variety of alternative coins, causing smaller coins to experience greater price swings in both directions. The volatility across the entire crypto asset market on the 19th of May was a liquidation driven event as this excessive leverage was flushed out of the system. Overall, we view these corrections as being good for the medium term health of the market and great for investors on the sidelines who are looking to enter the market.

1 Month Chart of Bitcoin Price (USD)

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Elon Musk

On the 13th of May, Elon Musk announced that Tesla would no longer accept Bitcoin as payment for electric vehicles due to concerns over Bitcoin mining energy consumption. Elon’s tweet caused the price of Bitcoin to plummet -16% in just 3 hours and sparked fierce debate about the environmental impact of the coin. Following this initial tweet, the “Doge Father” continued to provoke his large twitter following by suggesting that he would sell Tesla’s BTC holdings and that he would instead accept DOGE as payment for electric vehicles. While neither of these scenarios have been formally announced, there is no shortage of speculative traders looking to trade in anticipation of Elon’s tweets.

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The Chinese crypto community has seen two large-scale crackdowns over the last decade. China’s central bank first banned financial institutions from offering services related to Bitcoin in 2013 and expanded the ban to all crypto assets and initial coin offerings in 2017. Despite these crackdowns, crypto trading has persisted in the region and China is recognised as the largest miner of Bitcoin in the world.

In the past week, China has issued two announcements about crypto assets. The first is a warning pointed at Chinese commercial banks and payment companies who have been friendly to crypto- related businesses. The second is Bitcoin mining related.

The first announcement came on Wednesday the 19th where the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China published a notice saying member financial institutions should not provide services to crypto-related transactions or investment funds. This notice was a reiteration of the existing ban, but many media outlets misrepresented this announcement as being a new ban which contributed to the volatility and panic on the day.

Three days later, China’s financial committee added Bitcoin mining as a key sector to crackdown on in an attempt to “resolutely prevent and control financial risks.” While the report included a list of activities beyond Bitcoin mining, this was the first time that the State Council has explicitly spoken out on Bitcoin mining. Sources suggest that the crackdown on Bitcoin miners will be limited to coal-powered operations, which is an overall positive given the effect of Elon Musk’s comments.

Joe Biden

The last major news event that contributed to the volatility seen over the past 2 weeks was The Treasury Department of the United States proposing that businesses must file a current transaction report when they receive cryptocurrency worth more than $10,000, just as most businesses are required to report cash payments of more than $10,000. The proposal is relatively insignificant to the current crypto market as it will not come into action until 2023. However, headlines such as “Biden Tax Enforcement Plan Includes Crypto Reporting Crackdown” spooked the market at first glance.

After digging into the details of these developments, it is clear that there have been no fundamental changes to the crypto asset market. We maintain the view that the panic seen on the 19th of May presents a unique opportunity to enter the market. In comparison to similar drawdowns seen in the 2017 ICO bubble, crypto is no longer an abstract bet on the future, but a growing reality all around us. The recent flushing out of the excessive leverage in the crypto markets will enable crypto assets to experience more organic growth going forward.

Matthew Harcourt

Matthew has been actively investing in the crypto markets for 7 years and holds a Bachelor of Business from Monash University, majoring in Accounting. Matthew focuses on portfolio construction through thorough research and analysis of crypto protocols as well as execution of investments and strategies. Matthew’s passion lies in supporting portfolio companies through advisory on tokenomics and strategy, adding significant value to Apollo’s early-stage investments.