The Crypto Dip

Bitcoin tumbled below the $40K mark on Wednesday, a three-and-a-half month low. It has dropped by 40% from a record high of $64,895 on April 14th. In a domino effect, other cryptocurrencies took a major hit too, Ether dropped by 28% which brings its weekly loss to 40% since its record high on May 12th.  Meme-based Dogecoin also took a hit of nearly 30%, according to Coingecko. When we take into account the total market capitalization of all the 9,944 coins in existence, the value fell by 38% i.e. from $2.5 trillion on May 12th to $1.5 trillion on May 19th. 

There are four plausible reasons for the continued dip this past week – 1) China’s announcement to ban and introduce stricter restrictions towards cryptocurrency, 2) Tesla rejects Bitcoin as a mode of payment when purchasing a car, 3) Binance is under investigation by the IRS and DOJ and lastly 4) A natural price correction.

The graph below depicts the Bitcoin price movement for the past week. Note the price dip after Elon Musk’s tweet on May 12th and China’s announcement on the ban on May 18th.

Source: Coindesk

Let’s jump into some details:

  • China banned crypto 

China has made several attempts to ban crypto each time making it more stringent. In 2013 the government had announced that individuals were allowed to freely participate in the online trade of Bitcoin, but later in that same year their financial regulators, including the People’s Bank of China, banned banks and payment companies from providing Bitcoin-related services. At the end of 2017, they banned Initial coin offerings which also meant that trading platforms were banned from converting legal tender into cryptocurrencies and vice versa. This prevented about 90% of global bitcoin trading. Additionally, all financial firms and payment companies were banned from providing any service for ICOs and cryptocurrencies. 

In the most recent joint announcement, three state-backed organizations extended the ban to include banks and online payment services that would offer individuals registration, trading, clearing, and settlement facilities. They have also warned the investors from speculative crypto trading stating “Recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order”. A point to be noted is that even though China has banned institutions from providing services it does not ban individuals to hold and own the asset. This announcement led to Bitcoin dropping to $36,250.

  • Elon Musk rejects Bitcoin 

Back in February, Elon Musk announced that Tesla would allow customers to transact using Bitcoin and that it had purchased $1.5 billion worth of coins. This was seen as a show of confidence and the coin soared, Tesla made a paper profit of well over $1 billion.  But unexpectedly last week Tesla sold 10% of its holdings and suspended vehicle purchases using Bitcoin due to “environmental concerns”.  He stated in a tweet “We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel”. He also added that he does not intend to sell any bitcoin and would reinstate the transactions once bitcoin mining adopts a more sustainable approach.  

Now given that there are reports that allege that the bitcoin network consumes as much electricity as a medium-sized country, why did Elon Musk make such an announcement only to take a U-turn a few months later.  Some people speculate that he is trying to manipulate the market, but as mentioned before Tesla has promised not to dump their holdings, yet. 

Another theory started by a Twitter user is that this is an elaborate ploy to sway the regulators at the Environment Protection Agency, EPA. Tesla has allegedly submitted an application to EPA and if it is accepted, it could mean that Tesla could start generating and selling Renewable Identification Numbers, similar to Renewable Energy Certificates, creating billions in revenue. 

On the flip side of the coin, Musk continues to promote Dogecoin. In a recent appearance on SNL, he jokingly referred to it as a “hustle”. The meme coin is certainly low energy in comparison.  If one scans his Twitter, they will find that he clearly favors Dogecoin and that could be a potential replacement for Bitcoin while transacting with Tesla. He even stated that he was working with Doge developers to improve its transaction efficiency and the company has confirmed that Musk has been advising them since 2019.

  • Binance under investigation

As reported by Bloomberg, the world’s biggest cryptocurrency exchange is being investigated by the Internal Revenue Service and the US Department of Justice on grounds of money laundering and tax offenses. The exchange possibly facilitated illegal trades to the tune of $756 million in 2019. Chianalysis Inc, a blockchain forensics firm, reported last year that 27% of funds tied to criminal activity were transacted via Binance more than any other crypto exchange. Jessica Jung, the official spokeswoman of Binance, said in an email statement, “We take our legal obligations very seriously and engage with regulators and law enforcement in a collaborative fashion,”. She added, “We have worked hard to build a robust compliance program that incorporates anti-money laundering principles and tools used by financial institutions to detect and address suspicious activity.” 

Binance is also being investigated by the US Commodity Futures Trading Commission since march, over whether it permits its users to make illegal trades. US residents are permitted to buy derivatives linked to digital tokens only if the firm offering them is registered with the CFTC. The authorities are investigating whether the exchange allowed its investors to purchase them otherwise.

  • Natural price correction 

Like any other financial asset, cryptocurrency shows a cyclical nature. These price corrections are natural for assets that have a long bull run. The crypto market saw many new investors at the beginning of this year but as soon as the markets became volatile they started panic selling. In an interview with Economic Times, Nischal Shetty, Founder & CEO of WazirX, one of India’s largest crypto trading platform, rightly said, “This dip will mature the markets more and ensure that people are aware there will be downtrends as well as uptrends in the sector and one should invest with a long-term view rather than for making a quick buck”.

In an article by Financial Express, Edul Patel, CEO and Co-founder, Mudrex, stated “The ​correction was​ long foreseen​ and has limited to do with just China’s crypto ban.​​ The correction was expected in the last couple of months as money had already started to move out of Bitcoin since its prices had skyrocketed. Historically, we witnessed Bitcoin first moving down followed by an upswing in other coins like Ethereum and Binance Coin, etc. The market at this point was looking for some negative news that could act as a trigger. Here, the China ban seems to be that trigger,”.

With all of the grim news, there seems to be a light flickering at the end of the tunnel for India. The government plans to form a panel that seeks to regulate cryptocurrencies as digital assets. The discussions seem to be at an early stage with the composition of the panel unknown. Additionally, in the parliamentary session in March, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was scheduled to be tabled but was deferred for reasons not known. The current draft of this bill, made by the previous crypto committee, possibly criminalizes the trading and holding of cryptocurrency assets. But the recommendations seem to be dated and a fresh perspective is needed according to an official.

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