Can the Crypto Market Survive the Recent Flash Crash?
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In what has been dubbed as ‘El Salvador dip’ across crypto circles, the cryptocurrency market valuation dipped below the 2 trillion USD mark on September 7, the first time in three weeks. The total market value of cryptocurrencies dipped briefly on Tuesday last week to a low of about 1.9 trillion USD, representing nearly 420 billion USD in losses for the day, according to Coingecko.
Bitcoin, the largest crypto asset, witnessed a 15% drop, from highs of 51,000 USD to less than 43,000 USD in a couple of hours. Other crypto assets also witnessed double-digit drops from prices recorded 24 hours prior, with top altcoins such as Ethereum, Solana, and Cardano losing between 13% to 18% during the flash crash.
Less than a week later, on September 13, the market faced yet another crash on the back of fake news that Walmart will start accepting Litecoin payments. In less than an hour, the total market capitalization grew over 110 billion USD to 2.24 trillion USD at 1 PM GMT, before the FUD caused a 200 billion+ USD crush back to 2 trillion USD, at 1.45 PM GMT.
The recent volatile crypto price action is nothing short of what was expected following the August altcoin rally, which reflected “froth and retail investor mania as opposed to sustainable gains in the market” according to a statement from JP Morgan analysts. The rise of retail investor mania was also recorded in January and mid-May when crypto markets crashed about 13% and 50% respectively.
However, according to Steve Gregory, CEO at US-based crypto exchange Currency.com, who spoke in an interview on September 9, not a single factor caused the recent downfall in crypto prices, but rather a series of events happening sequentially, and culminating on the day of the drop.
Rolling in the deep
Agreeing with JP Morgan analysts, Gregory stated the heavy retail push upward, coupled with the bullish exuberance that increased the leverage amounts in the market, could have predicted the eventual fall in crypto prices. As retail levered their longs, whale accounts heavily shorted the market, “ kicking off a cascade of liquidations”, he said.
Over 3.2 billion USD in crypto longs were liquidated on September 7th as the market puked over 20% on most altcoin pairs. Funding rates strayed higher to about 50% annualized, indicating that a huge number of traders were willing to pay that much to obtain leverage - signaling a euphoric and over-leveraged market.
Notwithstanding, the traditional finance market also opened the week on a low with gold, silver, and equities dropping on September 7th on the back of a strengthening dollar against main reserve currencies and a slight increase in yield of the 10-year US government bonds. This could have impacted the crypto prices as well, as these assets are traditionally used to hedge against inflation.
The recent probe into Coinbase by the US Securities and Exchanges Commission (SEC) could also have played a factor in spreading fear across the crypto market, Gregory shared. SEC threatened to sue if the company launches its high-yield Lend product, a lawsuit that Coinbase deems unfair given other US-based crypto exchanges offer the same. Additionally, SEC is also investigating Uniswap Labs, the main developer behind one of the world's largest decentralized exchanges, Uniswap.
“The SEC’s attention on Coinbase and Uniswap Labs may have rattled confidence,” Gregory further stated. “Some may even believe that this event could be the precursor to another crypto-winter.”
Nonetheless, he believes it is unlikely for the US to precipitate the downfall of crypto “given that a lot of companies and a lot of investors will suffer”, which is far from what the SEC plans to do.
“The US is relatively loyal to the crypto market and they have no real reasons for extending overly strict regulations on the market.”
Finally, El Salvador announcing Bitcoin as a legal tender was the major news piece of the week but did little to stop the cascading prices of crypto. Shortly after their announcement on Monday, the citizens protested the move causing unrest in the country, which created a bad rapport to new users aiming at adopting the crypto asset.
Can the crypto markets wither from the bearish storms?
The market is still showing fundamental signals of the continuation of the bullish momentum heading to the last months of 2021. Bitcoin is likely to trade in a sideways manner in the coming 2 to 3 weeks, ranging between 45,000 USD to 48,000 USD, according to Gregory. The market recovery is set to be led by large investors gradually filling their bags as retail investors are scared away from the market with the current high volatility.
Unlike the mid-May crash and its subsequent recovery, the current price downfall may not last very long with BTC showing signals of near-term growth back to levels above 50,000 USD. With the interest rates announcement from the US Federal Reserve expected on September 14 and September 22, it is “possible that in the near-term BTC will actively move into growth again”, the Currency.com executive explained.
While it is unlikely that the Fed will significantly change the current interest rates, the monetary policy is set to be tightened. It’s most likely that the statement will be vague and the inflation rate will remain at the same level — 5.3 - 5.5%. This means that there’s an opportunity for retailers to rejoin the market in a bid to escape inflation and protect their funds.
So what’s the most possible scenario for Bitcoin in the coming months of 2021? According to Gregory, the market looks to return to its “super-cycle” in October, after ranging at current levels for two to three weeks, barring any significant changes in regulation and monetary policy.
“The market is still bullish, not only the crypto market but also on all the risk asset markets,” he said. “The sentiment is likely to change only if something changes significantly in the monetary policy of the world's leading central banks.”
Finally, on the question of whether Bitcoin will ever fall below 30,000 USD again, Gregory simply replied, “it’s unlikely”.