Bitcoin: from record highs to record lows

Cecilia 22 Nov 2021 bitcoin, ethereum, dogecoin, etf

October saw both the launch of the first Bitcoin ETF (BITO) and the cryptocurrency’s record high value of around $66,900 – all within the same week. Enthusiasm for Bitcoin died down pretty quickly the following Wednesday when its value fell below $60,000 in one fell swoop.

In November, the cryptocurrency recovered and even reached an all-time high at almost $69,000 on November 10^th, before crashing down again to around $57,000 on the 22^nd.

So, what is happening exactly?

First Bitcoin ETF introduced on the market

On Wednesday, October 20^th, Bitcoin saw its value increase by 4% reaching a value of $66,893.22. The cryptocurrency beat its previous record of $64,899 recorded in April this year.

There are several factors that have led to Bitcoin’s record high since it was created 10 years ago. The most significant factor was the introduction of the first Bitcoin-based ETF on the New York Stock Exchange. According to ProShares:

"ProShares Bitcoin Strategy ETF (BITO) is the first U.S. bitcoin-linked ETF offering investors an opportunity to gain exposure to bitcoin returns in a convenient, liquid and transparent way. The Fund seeks to provide capital appreciation primarily through managed exposure to bitcoin futures contracts.”

Bitcoin’s record value also came shortly after the US Federal Reserve announced it had no intention of restricting the use of Bitcoin in the country. Soon after Chairman Jerome Powell’s announcement, Bitcoin increased by 10.1% reaching $47,319.94.

With a greater acceptance of Bitcoin as a legitimate currency, and the newly forged alliance between Blockchain technology and institutional finance, investors hope to see many more cryptocurrency funds enter the market.

A series of unfortunate crashes in October

Despite these promising new prospects for Bitcoin, it seems things went awry for the cryptocurrency barely a week later. Bitcoin indeed had several crashes within the same day. The cryptocurrency fell under $59,000, a tumble of around $7,000.

According to Charlie Silver, co-founder of Blockforce Capital:

"once investors realize that these futures ETFs create no new demand for BTC and are only a side bet on short-term price appreciation we may see significant price erosion.”

So were these crashes really due to the sobering realisation that investing in this new ETF does not mean investing in Bitcoin directly but investing in Bitcoin futures contracts. An important distinction indeed, but not necessarily the whole story.

Blockchain data suggests Bitcoin’s recent price crash was also due to long-term Bitcoin holders cashing in on some of their profits, which is quite common when a currency reaches a new record high.

The drop was also predicted by analysts who were reported to have been “on edge” for quite some time, expecting the over-leveraged crypto market to be corrected sooner rather than later. According to Freddie Evans, sales trader at GlobalBlock,

“the drop has been predicted by many analysts and provides an opportunity to those looking to buy the dip, meaning it could be that this retracement is short-lived, and we head back above $60,000 before too long.”

Indeed, 2021 has seen multiple flash crashes quicky followed by significant bounce backs. The near future of Bitcoin may not be so grim after all. It does seem, however, that Bitcoin has a few crashes ahead of it – as demonstrated by the cryptocurrency’s recent ups and downs throughout the month of November.

Additional blows in November

As predicted by many, Bitcoin recovered quite well early November and reached another record high of $68,778.48. Soon after, the cryptocurrency crashed again to $57,184.38. Analysts linked the dip to the following factors.

The US Securities and Exchange Commission (SEC) rejected VanEck’s spot Bitcoin ETF proposal. This decision was to be expected as SEC Chair Gary Gensler had previously been open about his preference for bitcoin futures ETFs (such as ProShares’ Bitcoin strategy ETF, mentioned above), rather than ETFs that hold Bitcoin. The SEC’s official response was that “[the fund] has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with (…) the requirement that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and to ‘protect investors and the public interest.’”

As another possible reason for Bitcoin’s crash, Twitter’s CFO Ned Segal said in a recent interview that investing in crypto assets such as Bitcoin “doesn’t make sense right now”. He added that Twitter Inc. prefers to hold assets that are less volatile, such as securities. It is entirely possible that his declaration swayed a few crypto investors.

Analysts also believe Bitcoin may have been affected by China and the USA’s policy on cryptocurrencies. China is indeed renewing its pressure on state-owned firms to stop mining crypto tokens. National Development and Reform Commission spokesperson Meng Wei explained that mining “consumes lots of energy” and “produces lots of carbon emissions”, thus jeopardising the country’s efforts to limit its carbon footprint.

In the US, President Biden signed into law a $1 trillion US infrastructure bill that implements tougher crypto tax regulations. Crypto brokers will now be obligated to report transactions worth over $10,000 to tax authorities. However, the market is concerned that “broker” is too vague a term and may end up including miners and traders, which would be damaging to the crypto market.

An important reminder for crypto enthusiasts

If there is anything to be reminded of from recent events, it is the volatile nature of cryptocurrencies. DailyFX analyst Nicholas Cawley warned that “after a week of fresh highs, today’s sell-off is a warning not to be complacent in this market, especially when high levels of volatility are always around the corner.”

Indeed, Bitcoin was not the only cryptocurrency to suffer losses over the past couple of months. In October, leading cryptocurrencies also tumbled in price, among which Ethereum, Binance Coin, Cardano, Solana and Ripple. All fell by 5 to 15%. The overall market was reported to have fallen below $2.5 trillion, a loss of $200 billion within a few days. In fact, at the time it seemed meme coin Shina Inu was the only crypto currency to increase in value, mostly likely because it is expected to be listed on trading app Robinhood.

Over the past 24 hours (Nov 21-22), the crypto market suffered further losses. Bitcoin dropped by 3.17%, as did other cryptocurrencies such as Ethereum (-3.89%), XRP (-2.64%), Dogecoin (-3.14%) and Shiba Inu (-4.34%).

Many analysts do remain optimistic at Bitcoin’s prospects. Dutch analyst PlanB believes Bitcoin could hit $135,000 by December. So far, their predictions have been pretty accurate but, as always, caution is advised!