#1: Overleveraging in the Bitcoin derivatives market
One of the major reasons why Bitcoin crashed on Thursday was because it fell victim to a large unwinding of leverage trades in derivatives listed across major exchanges.
Nearly $2 billion-worth of derivative positions were liquidated over 24 hours. Of that, more than $1.6 billion-worth closed in 12 hours.
But this was expected, as the cost of holding long positions in the futures market, also known as the funding rate, rose sharply to a multi-month high.
This is a sign that either traders are overleveraging, or there’s an overheating in the crypto market.
The consequence of this? Yip, a crash in the Bitcoin price.
#2: Crypto Whales cashing in profits
Over the past two months or so, Bitcoin has rallied from around $10,000 to $19,500. That’s nearly 100% return in such a short time.
So you’d expect investors and trader to take some profits off the table. And that’s exactly what’s happened.
Added to this are the “crypto whales” – the biggest holders of Bitcoin.
About 2% of the anonymous ownership accounts that can be tracked on the cryptocurrency’s Blockchain, control 95% of the digital asset.
So when major investors offload some of their Bitcoin holdings, you can expect a big price drop. This is something that’s not new to the crypto markets.
Many of the previous Bitcoin crashes can be attributed to crypto whales cashing in their profits.
#3: Fears over tighter crypto regulation
On Wednesday, Coinbase’s CEO Brian Armstrong tweeted about speculation that the US is considering new rules that would undermine anonymity in digital transactions.
In a thread on Twitter, the CEO hinted at the idea that the US Treasury Department is planning to track owners of self-hosted cryptocurrency wallets.
These crypto wallets are important, because they allow anyone to use this new technology to access basic financial services - just like anyone can use a computer or smartphone to access the open internet.
Brian Armstrong went on to say,
This proposed regulation would, we think, require financial institutions like Coinbase to verify the recipient/owner of the self-hosted wallet, collecting identifying information on that party, before a withdrawal could be sent to that self-hosted wallet.
This sounds like a reasonable idea on the surface, but it is a bad idea in practice because it is often impractical to collect identifying information on a recipient in the cryptoeconomy.
Again it all comes down to privacy…
Many recipients (in the US or abroad) who value their financial privacy, may simply not want to upload more identifying documents to various companies, which could be hacked or stolen.
This additional friction would kill many of the emerging use cases for crypto.
Given these barriers, we're likely to see fewer transactions from crypto financial institutions to self-hosted wallets.
I cannot say right now if these rumours are true or not. Brian Armstrong along with a number of other crypto companies and investors have sent letters to the US treasury to share their concerns.
All we can do is wait for the response of the US government. But I do expect some form of crypto regulation coming sometime in the future.
Did you miss ANOTHER triple-digit gain this last month?
Those canny Pickpocket Traders didn’t - this time a 111% gain from a trade.
And this isn’t a one-off lucky strike. Since the beginning of this year, Trader X and his followers have banked gains of 323% from the US500... 64% from Lloyds and 114% from Porsche!
So what should you do now?
By now, we are used to big crashes in the crypto market.
Remember, the crypto market is still in its infancy. Big drops are expected.
So the main lesson is don’t worry about massive price drops. Don’t check prices every day. And don’t allow your mood or outlook on life be dictated by a wild market like this.
See you next week.
Managing Editor, The South African Investor