CRYPTOCURRENCY: Bitcoin loses more than 20% of its value and no one really knows why

Bitcoin went down 20%, losing $35 billion of market cap in a flash last week. We're not focused on every gyration of the markets, but this case deserves analysis as the cause for such a shift is still (excuse the pun) in the ether. The first quick point is to remind you that there are four major components of BTC value we see: (1) secular, permanent adoption of blockchain technology across every use-case, (2) the proliferation of new crypto assets that reduce the use-cases that BTC satisfies, (3) a team's operating ability to grow and maintain the network, and (4) the financialization of the sector. Putting aside (4), we can say that the more stablecoins that succeed at payments, the less BTC will be the medium of exchange; the more smart contracts platforms that grow DApps, the less BTC will be programmable; the more Ripple (XRP) banks use, the less BTC they are likely to adopt. But there are massive tailwinds in the secular shift for the sector overall, which should counterbalance increased specialization. Smaller pie slice, bigger pie.

We try to be pragmatic when it comes to separating the real variables impacting the growth and maturation of this market versus the noise (and there is a lot of it), manipulation and unrealistic expectations. But we honestly cannot recall a time when such a shift in the price of crypto made less sense. It is important for us to caveat this with the fact that, in our opinion, no one has proven to provide evidence that they have reliable insight ahead of big crypto trade movements, and unpredictable (regardless of how comprehensive the technical analysis is) price action. Historically, rationalization around crypto trade movements occur only after the event took place, however, the recent crypto market decline has yet to hold a valid explanation as to its cause.

So far, we know three things. (1) The rumor surrounding declines in hash rates has since been entirely debunked. (2) The disappointing launch of physical bitcoin futures contracts by Intercontinental Exchange’s (ICE) Bakkt triggered a selloff fueling a flurry of levered unwinds (the liquidation of a trading position due to an upswing or a downswing in price) and stop-loss order liquidations. Such a run shifted market sentiment to confusion and/or fear, and prolonged selling pressure even when the market attempted to regain equilibrium. This was validated by Mati Greenspan, senior market analyst at trading platform eToro: “In my mind, the main catalyst for last night’s crypto crash was due to the underwhelming Bakkt launch. People have been buying the rumor with high hopes for months and many have now sold the disappointing news.” (3) The infancy of the crypto ecosystem means that it is inherently difficult to move cash and crypto assets quickly and freely across trading venues and exchanges in order to effectively react to rapid market shifts. This is primarily due to the lack of prime brokers to facilitate the trades to swiftly in order to remove any resultant arb and inefficiency in the price of futures. Meaning, these arbs, and inefficiencies last longer than in traditional financial markets, and therefore exacerbate trading activity.

Effectively, we are comfortable to chalk the cause of the recent downturn to investor/trader behavioral and crypto market idiosyncrasies. Coming back to the financialization of the crypto sector, the apparent lack of asset managers or retail crypto owners means that investors/traders will always be at the mercy of large liquidating swings. But this is likely to change in the future, as we said there are massive tailwinds in the secular shift for the sector overall, which should counterbalance increased specialization. Smaller pie slice, bigger pie.