Deepdive into the crypto markets - May 2021
This month has been one of the most volatile measured in dollar terms ever. We have seen similar percentage moves up and down previously, but this time we are moving in the 10.000 USD range up and down like a knife cutting through butter. To say that some of the newer investors have been spooked is certainly an understatement.
The primary catalyst for the month's price movements was Elon Musk. Elon tweeted that Tesla will stop accepting bitcoin as a payment alternative due to environmental concerns. This sparked a large sell off in the entire crypto market with some coins dropping a good 80% before plateauing.
Further negative news was then revealed in the form of the Chinese Communist Party announcing that they will review the bitcoin mining industry in China to ensure that it follows their policies and guidelines. This was taken as further negative news by the market but is, at a deeper review, something positive. Bitcoin mining is today somewhat centralised in China and regulating it might move some of that hashpower out to other countries.
Bitcoin continues to climb and fall, so the question becomes one of time frames. Bitcoin is up about 1000% from its low point last year, but down 30% from its peak this year. Are you up 1000% or down 30% in your mind?
The crypto market
The recent price drop seems like it has been tough on many new investors. Thus, let us present to you the year to date chart. Bitcoin is above price levels from when we started the year by a good margin. “Hodl”,”Buidl”, but don't panic.
Bitcoin and the traditional industry
Bitcoin is volatile compared to other more traditional assets. So expect both climbing and falling on this list. However, with the recent tweets from Elon Musk in mind reminding us that he is a stark skeptic of bitcoins energy consumption due to its proof of work security model, it is amusing to see Tesla below Bitcoin on this chart.
Bitcoin and other cryptocurrencies
The bitcoin dominance is continuing a slow bleed towards altcoin land. To many this looks like you should diversify your assets into a basket of crypto. This might be successful, but the hard part is choosing the right crypto to invest in since just a traditional top 10 list has historically underperformed bitcoin drastically.
We continue our education section with another of the innovations of DeFi, namely the automated market maker. One of the most common ways to trade, and very similar to the CFMM we discussed earlier, the AMM or the automated market maker is the bread and butter of DeFi trading. Enjoy. What Are Automated Market Makers?
This month most impactful news
As much as $365 billion wiped off cryptocurrency market after Tesla stops car purchases with bitcoin
Billionaire Ray Dalio says he owns bitcoin, and its ‘greatest risk is its success’
Other interesting data
The blockchain is a curious beast where you can see how the ebb and flow of the new financial system and its users think by following their actions on the blockchain. One such metric that has been popularised with this current price correction is the Net Realized Profit/Loss metric seen below.
What this graph shows is how coins move, and if they are “in profit” or “in loss” when they do. For example, if a coin last moved when bitcoin was at 10.000 USD and now moved when it is at 40.000 USD the transaction is “in profit”. Vice versa if the coin was last moved when bitcoin was at 60.000 USD and now moved at 40.000 USD it is “in loss”.
As seen in the graph the current dump was by far the highest “in loss” movement in bitcoins history measured in dollar terms. As we read it, it means a lot of people were very scared and sold at a loss. “Weak hands” as they are known in the industry are the antithesis of the hodler, and while it might look scary at first glance this chart shows you that coins have moved from weak hands to stronger hands. Since for every seller there must be a buyer and this buyer now entered the market at a lower price.