Bitcoin: Why the Cryptocurrency Crashed | Modern Alpha Channel

By Jason Guthrie, Director of Capital Markets, WisdomTree Europe

Wednesday, May 19, was a massive down day for bitcoin and crypto, and there is a lot of speculation about what happened and if bitcoin and other crypto are in a bear market. Let’s look at what happened recently that may have precipitated the “crypto crash”:

  1. Elon Musk: The Twitter spat between Musk and the bitcoin maximalists was definitely impactful. Having someone as influential as Musk make negative comments may have caused some people to sell—likely the same people that had bought bitcoin because of him.
  2. Reuters broke a story about China banning crypto. A story about governments banning Bitcoin may make people nervous—after all, if one government does it then surely others will too.
  3. The OCC1 indicated it is reviewing its previous edicts on crypto. This follows a change in leadership at the OCC, with incoming comptroller, Michael Hsu, reviewing decisions by his predecessor that were viewed as supportive of bitcoin.
  4. The SEC2 cautioned investors about the use of bitcoin futures in mutual funds.
  5. BlockFi3 mistakenly paid rewards in bitcoin instead of USD (i.e., giving 100 BTC instead of 100 USD). In the process of rectifying the situation, BlockFi sent letters to clients threatening legal action. This may call into question the stability of a major player in the DeFi4 lending space.
  6. There was a tech stock sell-off, with the Dow Jones down approximately -5.2% from the peak. Bitcoin does not exist in isolation, and general market turbulence will affect sentiment.

This may be considered a heavy negative news flow, and while all markets are susceptible to negative sentiment, bitcoin may be more reactive because it is young, decentralized and largely unregulated. When news like this comes all at once, the market could overreact—which may have been the case on May 19.

It’s important to remember that the fundamentals of Bitcoin have not necessarily changed, and it may be worth noting:

  1. Tesla did NOT sell. (Elon Musk confirmed this.)
  2. China “banning” Bitcoin is not a new phenomenon.
  3. Regulators like the OCC and SEC have previously expressed statements of caution.
  4. The path to adoption isn’t a straight line, and some companies may make mistakes along the way.
  5. Markets go up and down.

For the investment community, the #cryptocrash is a big deal. Nevertheless, it is important to look at the big picture and separate this from the noise.

Originally published by WisdomTree, 5/27/21

Office of the Comptroller of the Currency
The U.S. Securities and Exchange Commission
BlockFi is a crypto management platform
Decentralized finance

Important Risks Related to this Article

Jason Guthrie is an employee of WisdomTree UK Limited, a European subsidiary of WisdomTree Asset Management, Inc.’s, parent company WisdomTree Investments, Inc.

There are risks associated with investing, including the possible loss of principal. Crypto assets, such as bitcoin and ether, are complex, generally exhibit extreme price volatility and unpredictability and should be viewed as highly speculative assets. Crypto assets are frequently referred to as crypto “currencies,” but they typically operate without central authority or banks, are not backed by any government or issuing entity (i.e., no right of recourse), have no government or insurance protections, are not legal tender and have limited or no usability as compared to fiat currencies. Federal, state or foreign governments may restrict the use, transfer, exchange and value of crypto assets, and regulation in the U.S. and worldwide is still developing. Crypto asset exchanges and/or settlement facilities may stop operating, permanently shut down or experience issues due to security breaches, fraud, insolvency, market manipulation, market surveillance, KYC/AML (know your customer/anti-money laundering) procedures, noncompliance with applicable rules and regulations, technical glitches, hackers, malware or other reasons, which could negatively impact the price of any cryptocurrency traded on such exchanges or reliant on a settlement facility or otherwise may prevent access or use of the crypto asset. Crypto assets can experience unique events, such as forks or airdrops, which can impact the value and functionality of the crypto asset. Crypto asset transactions are generally irreversible, which means that a crypto asset may be unrecoverable in instances where: (i) it is sent to an incorrect address, (ii) the incorrect amount is sent or (iii) transactions are made fraudulently from an account. A crypto asset may decline in popularity, acceptance or use, thereby impairing its price, and the price of a crypto asset may also be impacted by the transactions of a small number of holders of such crypto asset. Crypto assets may be difficult to value, and valuations, even for the same crypto asset, may differ significantly by pricing source or otherwise be suspect due to market fragmentation, illiquidity, volatility and the potential for manipulation. Crypto assets generally rely on blockchain technology, and blockchain technology is a relatively new and untested technology that operates as a distributed ledger. Blockchain systems could be subject to internet connectivity disruptions, consensus failures or cybersecurity attacks, and the date or time that you initiate a transaction may be different than when it is recorded on the blockchain. Access to a given blockchain requires an individualized key, which, if compromised, could result in loss due to theft, destruction or inaccessibility. In addition, different crypto assets exhibit different characteristics, use cases and risk profiles. Information provided by WisdomTree regarding digital assets, crypto assets or blockchain networks should not be considered or relied upon as investment or other advice, as a recommendation from WisdomTree, including regarding the use or suitability of any particular digital asset, crypto asset, blockchain network or strategy. WisdomTree is not acting and has not agreed to act in an investment advisory, fiduciary or quasi-fiduciary capacity to any advisor, end client or investor, and has no responsibility in connection therewith, with respect to any digital assets, crypto assets or blockchain networks.

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