Apr 18, 2021

What happened to Bitcoin and where do we go from here?

After a period of stability you might have noticed the sudden crypto price slide 12 hours ago. Bitcoin slid 12% in 20 minutes, triggering record liquidations of long positions: $4.6b Bitcoin and $10b in total. What does this all mean?

After hitting an ATH close to $65k on April 14 Bitcoin skidded to $58k over the next few days, before plunging shortly after 3 am UTC today. The low point was just above $51k. Since then BTC has rebounded somewhat, getting back to $55k. The wider crypto market was pulled into the tailspin with all major assets dropping and then rebounding accordingly.

Bitcoin Price

This bumpy ride came on the heels of a period of admirable price stability. Since the end of March Bitcoin has been loitering in the $56k-$60k range. This was widely seen as a bullish sign, as historically market cycles ended with a sharp peak, not a gradual skid. The market seemed to follow this thinking, as even miners started accumulating Bitcoin. This is especially noteworthy, as these companies usually need to sell off their earnings to cover operating cost. While it is reasonable to assume they've had cash on hand due to the recent industry earnings spike, the fact they chose to invest it in more BTC was noteworthy.

Miners' position on BTC

Leveraged traders agreed with the bullish market outlook, as the number of liquidations decreased across the board. If any happened, then only during price drops, meaning traders expected continued price growth.

Liquidation history BTC April 2021

So what happened in the last few days? For one Turkey banned using crypto for payments, which at all probability might have triggered the initial price slide. While Turkey is not a major crypto market, it is a relatively big country and negative regulation usually has investors asking if this is the start of a trend. But a far stronger impulse came from blackouts in China. They were instituted in the Xinjiang province due to safety issues related to electricity production and distribution. The province houses a big part of Bitcoin mining rigs, meaning the blackouts cut the BTC network hash (mining) rate by 20-40%.

BTC hash rates 2021

This pushed prices further down, as in the past sudden hash rate implosions had a short-term price correlation. Below you can see an example from November 2017.

Bitcoin Hash Rate November 2017

During the four-day price slide more and more long positions were liquidated, accelerating the downward avalanche. When the dust cleared up, BTC funding rates turned negative, meaning more people on the market had short rather than long positions. This has been a very rare occurence during the recent bull market.

 Bitcoin Futures Funding Rates

Where do we go from here? Bitcoin has recently been undergoing an unprecedented supply squeeze. An increasingly higher proportion of coins were being taken out of exchanges and becoming illiquid, as seen on this CryptoQuant chart

Bitcoin reserve on exchanges

The supply squeeze was driven by institutional buyers. This caused increased stability on the market, as institutional buyers are far less likely to use leverage than retail traders. The leverage ratio has sharply dropped this year, oscillating in the last quarter at much lower levels than usual.

Binance estimated BTC leverage ratio

It is still early, but for now it seems the recent dip did nothing to change the accumulation trend. The market sees the plunge as a buying opportunity. There is no continuing sell-off. The effect might rather be an increased supply squeeze as major investors buy the dip.

Wiping out leverage is a good sign in itself. Firstly a dip in funding rates was historically followed by price growth. Secondly leverage increases price volatility, accentuating both the spikes and the plunges. The current consensus on Bitcoin is it is an interesting asset, albeit a volatile one. The less leverage on the market, the more stability we have. One might make the case Bitcoin is now weighed down by a negative risk premium. It is a great store of value with low transaction cost but the volatility pushes its price lower than it should be. While the leverage traders will return, if they return in smaller numbers, the lower price volatility might induce more institutions to join the market. This can deepen the supply squeeze and drive up the price.

On the other hand the price plunge itself was a great example for the volatility narrative. While electricity outages in China might have effects on all markets, few major assets have 12% of their value shaved off within minutes. So while less leverage means effectively more stability, the plunge in itself does not support the stability story.

However, it would be a precedent if Bitcoin does not return to a position of strength after funding rates revert to zero. Most market participants see it as a reset, cooling down the overheated market and setting the fundament for further growth. At any rate, as usual, there is no excuse for not doing your own research. Check the data, compare it to past events and make your own predictions.