Why is Bitcoin Crashing?

Bitcoin (BTC) has come up under scrutiny this week after its price dropped well below $40k, a far cry from the highs of around $64k seen only a month ago.

Bitcoin (BTC) Price Chart

The sharp volatility is the primary factor feeding its critics as several events have contributed to what is yet another sudden price correction and significant drop:

Elon Musk tweets

On May 12, Tesla CEO Elon Musk said the electric car maker had suspended vehicle purchases using Bitcoin, citing environmental concerns over the so-called computational "mining" process.

Despite this, early this week, the Tesla CEO clarified that the company has "not sold any Bitcoin.". The tweets prompted a lot of reactions , but perhaps the on one that most simply summed up the mood came from Peter Schiff. The famous financial commentator tweeted on Monday:

"If a single @elonmusk tweet can have so much influence over the price of #Bitcoin how can anyone seriously consider it to be money?"The full reaction you can find here.

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China Government Ban

China has moved to ban financial institutions and payments companies from offering Bitcoin services to clients, including registration, trading, clearing and settlement, Reuters reported.

Three industry bodies specified in a joint statement on Tuesday:

"Recently, crypto currency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people's property and disrupting the normal economic and financial order,"

The article goes on to point out that even prior to the ban, the official position was already that "China does not recognise cryptocurrencies as legal tender and the banking system does not accept cryptocurrencies or provide relevant services.''

Other countries targeting Cryptocurrency

Several other countries have introduced various restrictions on cryptocurrency. Most notably Turkey has suspended all crypto transactions and India proposes a ban and has threatened to go as far as penalising miners.

Those developments have sparked a wave of criticism by analysts. Nassim Taleb who was initially bullish on cryptocurrencies, is now staying clear. The bestselling author of "The Black Swan" and "Skin in the Game'' recently shared in a CNBC interview:

"*It has the characteristics of an open Ponzi. There is no connection between inflation and Bitcoin. It is a beautifully set up cryptographic system. It is well made but there is absolutely no reason it should be linked to anything economic."

"If you want to hedge against inflation, buy a piece of land and grow olives, so you have olive oil. But Bitcoin has no connection… the best strategy for an investor is to own things that produce yield in the future. "

"I thought initially Bitcoin will be a currency, in a sense that it's something to transact with. It proved to be too volatile and turned into a speculative tool. Something that moves 5% in a day or 20% in a month, up or down, cannot be a currency. It's something else."

On the question of wide adoption, Taleb responded:

"The fact that someone accepts bitcoin as a form of payment is very different from treating it as a currency. You have to commit to a fixed price in Bitcoin."

Bitcoin advocates however have gone as far as saying the cryptocurrency is a major threat to central banks and view it as an asset to protect against inflation. Despite the recent sharp drop, they point out to the overall price surge in the past year. Bitcoin is still up over 40% year-to-date and 320% in the last 12 months.

Analyst Vijay Ayyar, said that a 30% to 40% pullback is "normal" during bitcoin bull markets.
"So this is very much expected after we topped out at 64K ($64,000)," he said. Ayyar pointed to a roughly 35% correction in January as well as similar falls during the huge run-up in bitcoin's price in 2017.

"We are definitely close to a bottom" he mentioned, referring to the sub 40k levels,

Apart from the reasons for volatility, one more question seems to bother the retail investor – Why do cryptos move together? Both issues are trending topics of discussion on reddit, where the top crypto forum that now boosts almost 3 million members.

Cryptocurrencies have noticeably moved together, causing the debates as to why this is happening. There is some ground to this – other major cryptocurrencies have indeed experienced significant downturn, some even more than Bitcoin. Looking at the stats for the past 7 days, Ethereum (ETH) and Stellar (XLM) have both lost around 30%, Litecoin (LTC) has lost almost 35%. EOS is 40% down and the recent sensation Dogecoin (DOGE) has lost more than 30% of its value.

Ethereum Price Chart

Key questions now remain: Will they all recover simultaneously? Which one will recover first, or will the bearish trend continue? These are yet to be answered in what is certainly an intriguing time in the crypto world.

Kalin Tsenov

Product Specialist

Kalin Tsenov has a strong research background in economics with specific interests in Geopolitics and its impact on the Financial Markets.

He joined FXCM in 2018 after obtaining a Bachelor's Degree from Leeds Metropolitan University. Initially starting as a Business Analyst in the Payment Solutions department, he is currently a Product Specialist in the Firms Product & Strategy department.

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