Crash! Hallelujah! Hey Bhagwan! Ya Allah! Devastation, disaster, a catastrophe. These words would NOT be an understatement if you are a regular investor in cryptocurrency like I am. Crypto markets entered a free fall state yesterday, and a wealth of $1 trillion was wiped off, as if Thanos just snapped his fingers. As BTC recorded it’s biggest single day fall, hell broke lose for all crypto hodlers across the world. Markets were bleeding red, news channels were running this news flash the entire day AND anti-crypto gang began the process of self appraisal, where they had ALREADY warned everyone about this situation. But, why is crypto market down today? What should be your next steps? Let’s try to explore what actually happened.
Now, cryptocurrency, by it’s very nature is decentralized. That was one of the core propositions of this when it first came into the market. However, lately, some billionaires are trying to manipulate the market using the sheer influence they have. Yes Elon, we are talking to you! Such a behavior wouldn’t have been tolerated if this were about stock markets. Regulators have already penalized likes of Elon Musk for tweeting stuff about some company. This time around, since there are no regulatory body for cryptocurrency, he just gets away with whatever he says.
As a matter of fact, he recently made a fortune by manipulating the markets using Twitter. Here’s a short and sweet explainer post on the same:
What Specifically Brought the Crypto Market Down This Time?
So there are a couple of factors that led to a massive wealth destruction. Let’s explore them one by one:
1. Elon Musk and his Sudden Environmental Concerns:
As mentioned in the post above, Mr. Musk decided to purchase $1.5bn worth of BTC in February. As the price shot up, he decided to sell 10% of his holdings. Fast forward to a few days ago when a little introspection yielded a rather revealing outcome for his consciousness. He decided to tweet the following:
Now, you may not have any idea about the linkage between cryptocurrencies, mining and environment. Would you believe that a person who is working on unimaginable ideas like Starlink, Hyperloop, SpaceX would NOT know about these concerns already? It can’t be a sudden realization right?
Bitcoin and Environment Issues? What?
At this point, if you are wondering how these two things are even related to each other, you are at the right place. I explained the process of mining a couple of days ago. In order to validate the transactions and maintain the blockchain, the people who are spending their computer resources and electricity are rewarded in bitcoin.
This might seem to be a simple proposition but here’s are few eye opening facts regarding the mining if a SINGLE BITCOIN:
A single BTC is responsible for:
You see, there is a fundamental problem in mining bitcoin. BTC validates transactions using ‘proof of work’. What that means is that each computer willing to validate the transaction, will have to solve a complex mathematical problem to win ‘RIGHTS‘ to validate the transaction. Faster your computational power, resources deployed, higher are your chances of winning these rights repeatedly.
So, whenever a transaction is to be validated, there are tons of computers ‘racing’ with each other to solve the problem quickest. However, only one of them wins. This means a lot of energy, resources are wasted through computers which did not win this race.
Etherium tries to solve this problem, but we’ll leave that for another blogpost.
Apart from that, even if it were an honest realization at the last moment, it was incorrect. I agree that BTC mining has a problem, but that doesn’t mean printing dollars has NO implications. In fact dollar is more degrading to the environment with excessive use of paper, resources to manage it digitally.
Looking at some tweets posted in tandem to the one mentioned above, I believe he made an attempt to pump up his favorite crypto, Doge! He also ran a poll to ask people if Tesla should start accepting Doge instead. However, Mr. Musk forgot one key thing in this gimmick he tried to pull off.
Bitcoin has the largest Market Cap in the crypto market (>80%). So if BTC falls, panic in the entire market is inevitable. If you draw a parallel with Indian Stock Market, this would be an equivalent of saying that Reliance has dropped by 20% in a day and you are rooting for Vodafone to jump manifold because you support it’s cause. If Reliance is down by this margin, so is Sensex and so is overall market sentiment.
2. Chinese Regulations on Crypto:
While the market was emerging from the influential impact of an uninformed billionaire, Chinese government drilled the final nail in the coffin.
Chinese government issued a fresh set of guidelines and directed banks and online payment firms, not to offer any crypto-related services, such as account openings, registration, trading, clearing, settlement and insurance.
It made clear that institutions must not accept virtual currencies, or use them as a means of payment and settlement. Nor can institutions provide exchange services between cryptocurrencies and the yuan or foreign currencies.
Additionally, institutions were prohibited from providing cryptocurrency saving, trust or pledging services and issuing crypto-related financial products. And virtual currencies must not be used as investment targets by trust and fund products.
Banks and payment companies were also urged to step up monitoring of money flows involved in cryptocurrency trading, and coordinate more closely in identifying such risks. (Source: Reuters)
My Interpretation of significance of this ruling?
Actually, it is none. Not the extent of triggering a free fall like this. Chinese government had already started leashing crypto currency and putting bans around it in 2017 and this particular instance is just reiteration of the same. Of course some new regulations are put in place, but that doesn’t change the status of cryptos in China.
And because Robinhoods never bothered to research about this fact, there was a tremendous pressure to sell. A clear case of misinterpretation of a news.
Misinformation spreads faster than the truth, which is why no one took into account that Indian government actually agreed to regularize crypto and make laws to govern it. This puts an end to the speculation of crypto being banned in India altogether.
What Next? The Power of Conviction:
It is super easy to follow the herd mentality and hoard on assets/stocks/cryptos which have a hype around them. You might also be able to make a quick buck out of it too. However, in moments like these, actual research counts. That’s when you take a call weather to stay invested or run away.
If you are one of those who invested because Musk asked you to, you might have wrapped up and exited the market. However, if you really know what the real value and worth of the asset is, you will HODL.
I have invested about X till date in cryptocurrencies. Yesterday, at one point, this came down to 0.25X. Did I sell? Nope! Because fundamentally nothing has changed about crypto. It’s just some news based downward momentum. And as a result of this conviction, I saw a decent recovery within today. BTC rose from INR 28L to INR 33L within 24 hours.
So next time you invest in something, knowing in and out of it, will help you take a smart call.
Do you hold any crypto assets in your portfolio? Was your last night sleep a little uneasy?
As they say,
May your crypto investments be enough to NOT have FOMO and small enough to stay calm during such situations.
Got any other question? I will try my best to address them.
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Until next time..