VYSYN Ventures Weekly Insights #56 — Breaking down the key events of the latest cryptocurrency market cycle
It has been a rollercoaster year for Bitcoin and other crypto assets, with prices swinging wildly over the first two quarters of the year. The bullish trend of Q4 2020 and early 2021 has been superseded by a period of extreme volatility with price drawdowns of over 50%.
In the latest VYSYN Release, we highlight some of the major events that have had an impact on this volatility. We consider the role that institutions had to play in starting the latest cycle and we review how the market dynamics shifted to its current downtrend.
Bitcoin breakout sparked by institutional participants
Institutional investors played an undeniable role in the breakout of the bullish Bitcoin market movements of Q4 2020. Up until this point, Bitcoin traded largely in a phase of consolidation with vast uncertainty over its future outlook. What followed was an explosive bull market that brought Bitcoin to an all-time high of over $64k.
The purchase of Bitcoin by Microstrategy kicked off a trend of publicly-traded companies seeking to gain exposure to BTC and its limited supply. This trend caused even more explosive movements in February when Tesla announced that it had purchased $1.5 billion worth of BTC.
The bullish sentiment caused by these big players attracted many speculators, with Bitcoin and cryptocurrency awareness hitting very high levels as funds flowed into the markets. By February 2021, the Bitcoin market capitalization crossed the $1 Trillion mark, while it achieved an ATH of $64,895 about 2 months later.
The tide began to shift in recent months as corporations slowed down their investment activity. This combined with retail investors overexposing themselves to the asset set the tone for a significant drawdown. This drawdown became reality when comments from Elon Musk sparked significant downside price movements. In the current conditions, recent analysis highlights that hedge funds and money managers are heavily short in the Bitcoin CME futures market while retail investors are still long.
The bullish cycle beyond Bitcoin
Bitcoin was not the only cryptocurrency asset that received attention in the latest market cycle. Ethereum 2.0 was finally launched and the price of ETH recorded extraordinary upside movements alongside such developments, resulting in Ethereum reaching an all-time high of $4,380 in May. Similar to Bitcoin, Ethereum has entered a medium-term bearish trend.
Smaller cryptocurrency assets also grew alongside Bitcoin and Ethereum with some niches particularly benefiting from the increased awareness and attention given to these assets. Non-fungible tokens (NFTs) were the biggest winner as they secured a significant wave of adoption from enterprises and retail investors alike. Big names in the digital art space like Beeple used the technology to issue sales while Twitter CEO Jack Dorsey also issued an NFT. With a palpable excitement building around NFTs, the asset class similarly set up for a significant decline. Trading volumes dropped 95% from their peak but NFTs have still largely benefitted from the recent market cycle with significant household names experimenting with technology and more steady volume from smaller-scale investors.
Bearish trend kicks in
The market has since entered a medium-term bearish trend. Elon Musk catalyzed the entry into this bear trend after tweeting concerns regarding the environmental impact of Bitcoin mining. Negative regulatory developments coming from China only served to exacerbate the market conditions.
Governments in China have begun to clampdown on cryptocurrency-related activities, including mining. Bitcoin miners are reported to be migrating from the country which has always been the king of Bitcoin mining activities. Extended bans towards exchanges and other cryptocurrency-related businesses is likely playing a role by spurring countless holders to sell.
Bitcoin challenges represent a maturing market
The Bitcoin and cryptocurrency market is more mature than it used to be. In previous cycles, the market was largely comprised of retail speculators. The latest market cycle comes with a much larger share of the market being attributable to institutional and professional investors. This has attracted more attention towards the industry, both from regulators and the general public.
The current challenges faced by the industry and the market are characteristic of a more mature market. Similarly to how a blue chip stock is impacted by concerns regarding its future financial health, Bitcoin is being impacted by concerns regarding the health of the mining which underpins the network’s security.
As it stands, we are in the midst of a medium-term downtrend in the market cycles. This is not the first and it certainly won’t be the last. However, if the past is anything to go by, Bitcoin and the wider cryptocurrency market will emerge from this turbulent phase stronger than ever before.