- The recent BTC price turmoil is another episode of the market unwinding excessive leverage
- Outlook on the regulatory front remains optimistic as crypto mom’s Safe Harbor 2.0 outlines better regulatory guidelines for crypto startups
- A significant shift in tone as China’s central bank labels Bitcoin as an “investment alternative”
The lament of the bulls coming to an end over the slightest signs of exhaustion has almost become an integral part of a typical bull cycle. Without exceptions, the massive tumble over the weekend has stirred much outcry. Some speculate that the sell-off is triggered by news hinting towards U.S. regulatory watchdogs cracking down on crypto-related money laundering activities. The source of the news was from an unverified Twitter account — an inconvenient byproduct of the prevalence of social media journalism. However, it probes the question of how mature the crypto markets have become if they remain susceptible to violent sways engendered by one single all-caps tweet of unfounded allegations.
The Weekend Meltdown
The recipe for a meltdown requires an uncanny mixture of hearsays, seemingly substantiated rumors, and real but distant crises. The recent market meltdown felt particularly real because its time frame is preceded by an actual coal mine explosion in Xinjiang, China — a region known for its abundant natural resources and affordable electric power — the prime location for any large Bitcoin mining sites. Given the geopolitical tension in the region, the explosion warranted rigorous security scrutinies that could easily stretch into a week, and in turn, may have brought down mining activities in the region. However, the plunge in hashrate, which may take up to a week to recover, provides a window of opportunity for miners to hedge their future mining production. Therefore, it is safe to conclude that the decline in hashrate alone is not sufficient to bring down the price of Bitcoin by more than $10k.
The real reason, the one true culprit, behind any massive correction is over-leveraging. Funding rates went through the roof before the meltdown, indicating a heightened market euphoria over achieving yet another ATH. The market would need to unwind excessive leverage before resetting to a more sustainable price level. The reset is constructive to the long-term sustainability of Bitcoin’s price movement.
On the regulatory front, we would expect nothing short of good news. U.S. SEC Commissioner Hester Peirce, a.k.a crypto mom, has proposed Safe Harbor 2.0, prior to the confirmation of Gary Gensler as SEC chair. The initial proposal brought across the necessity of allowing a grace period for crypto projects to develop before subjecting them to compliance assessment of relevant SEC requirements. The revised version introduced on Tuesday offered specific checklists that evaluate whether a crypto startup is operational through the regulatory lens, including concrete criteria that delineate abstract concepts such as “decentralization” and “operability”. The appointment of another crypto-friendly face, Gary Gensler, as SEC chair could increase the probability of regulations leaning in favor of facilitating further crypto development, or so we hope.
On the other side of the globe, a potential shift in tone was detected as Li Bo, deputy governor of the People’s Bank of China (PBOC) referred to Bitcoin as an “investment alternative” during a panel hosted by CNBC at the Boao Forum for Asia. Li highlighted the imperatives of regulating Bitcoin and stablecoins to prevent the creation of “any serious financial stability risks”. He also pointed out that China’s regulatory bodies are conducting research on formulating appropriate frameworks and guidelines, with a slight hint of lifting the official ban imposed by the government on cryptocurrencies in 2017. This shift in tone has since stirred up positive market sentiments in crypto markets, injecting confidence into China’s crypto scene, particularly among projects involving the development of public chains. Granted that policy changes don’t happen overnight, we still see the speech as a signal that’s worth noting. Lifting the de facto ban on cryptos would introduce a huge amount of fund inflows into the crypto market.