- >How Far Will Bitcoin and Crypto Fall Before We Hit the Bottom?
How Far Will Bitcoin and Crypto Fall Before We Hit the Bottom?
Bitcoin and cryptocurrency are going through a turbulent time right now. More than a month after hitting an all-time high of $64,804, the price of bitcoin tumbled to a four-month low of $30,415, while altcoins have similarly plummeted by as much as 50% from recent record highs.
This downward spiral was set in motion by Tesla’s announcement that it will no longer be accepting bitcoin as a form of payment, yet other factors have conspired to add momentum. These range from announcements from the Chinese government to ongoing concerns over the status of Tether’s reserves, together creating a confused picture that leaves few investors (if any) with a clear idea of where the market is headed next.
Simon Chandler | May 20, 2021
Even if bitcoin has partially recovered from the $30,415 level, it still remains in a precarious position, and could slide further if more bad news or uncertainty emerges. Indeed, with Tesla possibly on the cusp of selling its bitcoin holdings, with a drying up of new institutional investors, and with a run on Tether remaining a distant possibility, bitcoin’s price could sink beyond $30,000 in the coming weeks.
Still, a drop to a sub-$30,000 could end up being the window of opportunity allowing more investors to enter the space, enabling bitcoin and crypto to scale up higher in the longer term.
Tesla Hasn’t Sold Its Bitcoin… Yet
Tesla was the catalyst for bitcoin’s ascent to new all-time highs, and it appears to be the catalyst for the cryptocurrency’s descent to $30,415. The market’s immediate response to its announcement on Wednesday May 12 was to sell bitcoin to just under $50,000, before it recovered slightly into the morning of May 13.
However, it has been sinking downwards ever since, occasionally correcting but generally falling as holders lose faith the market itself will hold. This is why, from $50,000 on May 13, bitcoin then worked its way down to $48,000, then $46,000, then $44,000, then $42,000, and so on, until it hit a temporary bottom of $30,415.
As of writing, bitcoin’s price stands at $40,000, which is 38% off its all-time high, but still 300% up on its price level from 12 months ago. That said, it could still decline further, particularly if Tesla takes the step of not only refusing bitcoin payments, but selling its stash of some 40,000 bitcoins.
Initially, many commentators assumed Tesla had sold its bitcoin, possibly doing so around the time of making its announcement about its non-acceptance of BTC as payment. This assumption was lent some weight by a characteristically cryptic tweet from Musk:
This follow-up tweet from Musk was another reason why bitcoin and the rest of crypto continued dropping, yet on May 19 — when the price of BTC hit $30,415 — Musk came to save the day by effectively suggesting that Tesla would never sell.
More than anything else, this tweet alone seemed to calm the market. Bitcoin recovered to nearly $41,000 early on May 20, yet its slight decline back down to $40,000 indicates that its troubles certainly haven’t ended.
But as the rest of this article will suggest, Tesla isn’t the only reason bitcoin was declining. And if it does continue to decline even now, Tesla may be forced to sell, causing bitcoin’s price to head further south.
Right now, Tesla can afford to hold, since it’s likely that it bought its BTC at around the $32,000 level. It doesn’t want it to fall below this level though, which is most likely why Musk felt compelled to post his ‘diamond hands’ tweet when bitcoin slumped to $30,415, to ensure that Tesla remained in profit on its BTC.
But if it does continue heading downwards, Tesla may have to offload its 40,000 BTC, which would be worth $1.28 billion at $32,000 each. That’s a big quantity, and it could seriously derail the market, causing bitcoin to dive into the $20,000-$30,000 range.
The other big threat is Tether. The stablecoin issuer has long been a controversial entity within the cryptocurrency market, yet it seems to be attracting a record amount of attention. This is largely because of its ongoing agreement with the New York Attorney General, to whom it has promised to share the constitution of its reserves on a quarterly basis.
On May 13, Tether published two pie charts illustrating the composition of its reserves. Most notably, it revealed that 49% of the reserves — backing some $58bn in USDT — consists in “commercial paper,” which means short-term loans to other companies. Tether didn’t name or disclose these companies, so it’s impossible to say whether it will actually receive the money it’s owed by them.
Combined with the fact that only 2.94% of its reserves are actually cash, this disclosure from Tether seemed to spook the market, adding to the downwards momentum from Tesla which pushed bitcoin to $30,415.
As observers on Twitter noted, the market appeared to be sufficiently fearful of Tether’s stability that USDT’s peg momentarily failed, with the ‘stablecoin’ falling as low $0.81 in some places.
There’s also the fact that May 19 was Tether’s deadline for reporting to NYAG with a detailed composition of its reserves. There’s no indication so far that it has satisfied this condition, with violation potentially resulting in the NYAG launching another investigation into the company.
If it has violated or does violate the conditions of its agreement, or if it shares info which reveals how poorly backed it is, this could cause market confidence in USDT to decline significantly. In fact, even people outside of crypto are preparing for the possibility of a run on Tether and the collapse of USDT’s value.
Wikipedia founder Jimmy Wales wades into the Tether debate. Source: Tether
Needless to say, if Tether’s stability does weaken, the price of bitcoin could fall substantially. This is largely because more bitcoin (at least 44%) is bought using USDT than using any other currency. Crypto depends on Tether, for better and (most probably) for worse.
It’s difficult to speculate on just how far bitcoin could fall if something happens to Tether in the next few weeks. If Tether’s collapse triggers a Tesla selloff and the exits of other companies and institutions, we could easily see bitcoin below $20,000.
As denizens of Twitter will tell you, it seems that most of the people buying the dip during the current bear market are old hands who’ve already amassed considerable quantities of bitcoin.
Buying the dip helps to support bitcoin’s price, but if only existing investors are doing this, it suggests a worrying lack of newer institutions and traders who’ll be able to actually push the price upwards.
Likewise, available evidence suggests that it has largely been retail investors who’ve pushed the cryptocurrency market to new highs over the past couple of months, and with these investors seemingly leaving the market at the moment, there appears to be a lack of new institutions and corporations (à la Tesla and MicroStrategy) to pick up the slack. In fact, a recent not from JPMorgan suggests that institutional interest in bitcoin is declining, with many institutions passing over bitcoin in favor of gold.
What this suggests is that newer investors (retail and institutional alike) may be holding off (re)entering the bitcoin market until it hits the bottom. But the thing is, with such investors staying away, it could still be a while before this bottom is hit.