The Recent Cryptocurrency Market: A Sudden Downturn
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The past few days in the cryptocurrency market have been quite unexpected. Bitcoin has fallen for the fourth consecutive trading day, dropping to its lowest level since February on Friday, and is on track for its worst weekly performance in a year. Smaller cryptocurrencies like Ethereum, XRP, and Cardano have seen even larger declines, most of which have exceeded 10%. Over the past 24 hours, more than 230,000 accounts have been liquidated, with losses exceeding $680 million.
**Reasons for the Cryptocurrency Downturn:**
1. **U.S. Elections:**
- Investors worldwide are grappling with the U.S. elections. President Joe Biden may bow to pressure from his party and political donors and withdraw from the re-election race. This could result in a new and possibly stronger Democratic contender. Although former President Trump has previously expressed support for cryptocurrencies, a new Democratic contender might not.
2. **Supply-side Issues:**
- **Mining Reward Halving:**
Recently, the halving event has plunged Bitcoin miners into a financial abyss. Since this event, miners' revenue has dropped by 63%, from $79 million per day to just $29 million per day. Blockchain analysis platform CryptoQuant has observed many signs of miner capitulation. The most notable is a 7.7% decline in hash rate since the halving, indicating increasing difficulty for miners to maintain operations. The halving limits the new tokens they earn through work, prompting some Bitcoin miners to sell part of their token reserves. Miners are accelerating the sale of their Bitcoin reserves, with daily BTC outflows from miner wallets reaching the highest level since May, indicating a large-scale sell-off. This phenomenon can be interpreted as a sign that miners, desperate due to declining revenues, prefer to liquidate assets rather than continue operating at a loss.
Investors often see miner capitulation as a buy signal. In fact, when miners are forced to sell their Bitcoins to cover costs, it exerts more downward pressure on Bitcoin's price than anticipated.
- **Decreased Demand for U.S. Bitcoin ETFs:**
The demand for U.S. Bitcoin exchange-traded funds has weakened, and the government is disposing of seized tokens. Richard Galvin, co-founder of the hedge fund Digital Asset Capital Management, noted that in the short term, Bitcoin's weakness is largely due to the unresolved Mt. Gox compensation issue and government sell-offs.
Mt. Gox was once a major Bitcoin exchange that went bankrupt in 2014 due to the theft of a large amount of Bitcoin. The "Mt. Gox compensation issue" refers to the pending compensation for the exchange's creditors, including victims of the theft and investors. The unresolved nature of this issue suggests delays or uncertainties in the compensation process, which could impact the Bitcoin market. If compensation occurs, a large amount of Bitcoin may flow into the market, potentially putting downward pressure on prices.
Recently, traders have been weighing the risks of the U.S. and German governments disposing of seized Bitcoins. Data from Arkham Intelligence showed that a wallet linked to Germany transferred approximately $75 million in tokens to an exchange on Thursday, the latest in a series of transfers.
On July 1, the German government transferred 1,500 BTC valued at approximately $95 million to several cryptocurrency exchanges, including Bitstamp, Coinbase, and Kraken. The U.S. government also conducted a similar large transaction, transferring 3,375 ETH valued at $11.75 million to an unknown address. These ETH funds were transferred from an address holding funds seized from an Estonian cryptocurrency entrepreneur. The recent frequent transfers by both governments indicate strategic management of their holdings. Germany may be looking to liquidate its holdings on major exchanges, while the U.S. government's transfer to an unknown wallet might suggest a change in ETH fund management policies. The recently passed EU Markets in Crypto-Assets Regulation (MiCA) could also influence Germany's cryptocurrency transfers.
3. **Liquidation of Bullish Bets:**
- According to Coinglass, more than $800 million worth of bullish cryptocurrency bets have been liquidated over the past three days, marking one of the largest liquidations since April. Caroline Mauron, co-founder of digital asset derivatives liquidity provider Orbit Markets, stated that poor weekend liquidity would exacerbate any volatility triggered by liquidations, even small-scale ones. The return of U.S. investors after the July 4 holiday could help bring some stability.
**Short-term vs. Long-term Bitcoin Investment:**
Short-term Bitcoin investments are mainly event-driven, with significant pressure during periods of news vacuum. In the long term, Bitcoin relies more on the public's declining confidence in fiat currencies amidst a loose monetary environment. The $51,000 to $52,000 range is crucial, as many Bitcoin miners are reaching the break-even point for mining.
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