Capitulation Edition

Why MMT experts think Bitcoin is not a bubble, Bitcoin's latest crash summary and the most interesting headlines from the last two weeks in the cryptocurrency universe

Bitcoin is not a bubble

Whether prices are ascending or crashing, public figure’s opinion is continuing to converge toward acceptance of Bitcoin and decentralized currency networks. Last week's volatility may have softened the hearts of some of its natural directors. 

In addition to Paul Krugman who grudgingly admitted Bitcoin is here to stay, this week, monetary policy and MMT expert Nathan Tankus explained in his latest blog post why Bitcoin is not a bubble : 

“Bitcoin has survived a number of big “crashes”, while Pets.com didn’t survive one...It would be a mistake to underestimate the unique and unprecedented resilience of digital items like Bitcoin. Crypto is volatile, but it's not a bubble. There is no ceiling, nor any floor.”

He also added a caveat, “I’ll take the idea that pure cryptocurrencies are a threat to state money not when bitcoin’s dollar price gets very high, but when its dollar price is irrelevant.” This day may be on the horizon, according to Brain Beamish, the financial industry veteran and founder of  the oldest cryptocurrency trading school, TRI, in 2014. “In all my years I’ve never seen stock, commodity or currency markets act the way they’re acting right now. I think they only act this way about once every 80-90 years, when the previous cycles’ established fiat currency system has been milked to exhaustion, and at that point we have to move to a new fiat currency system. So you get this pocket of maybe 10-20 years where nobody really knows what anything’s actual value is.” 

The Elon Musk candle strikes back

As you can see below, in the last few months, breaking news and tweet from the controversial Elon Musk affected the timing of Bitcoin market’s moves:

In the last week news broke of a possible financial ban on Bitcoin and mining in China, and the U.S. presented new IRS report requirements for crypto. Click to enlarge.

Last week’s rapid price decline caught many investors in a panic, as Bitcoin’s price lost 33.3% in one day (May 19th). The drop, briefly touching $29,800, was largely driven by leveraged positions’ automatic liquidations, which were triggered as Bitcoin dropped below $42,000. 

Top:Bitcoin/USD. Right: Bitcoin futures temporarily traded below spot on May 19th due to liquidation and exchange connectivity issues. Left: Bitcoin one-minute candle chart shows the outstanding volatility between 12:40 and 14:00 UTC May 19th

The bottom range of the May 19th drop was highly volatile and automation driven, with Ethereum at one point bouncing 20% in less than one minute and Bitcoin losing 15% in 5 minutes. Some exchanges lost connectivity for several hours due to user overload, and futures traded below spot. 

During this time Efficient Frontier’s trading and operations team followed emergency protocol successfully, with positive results and insights. May 19th served as a stress test for both our tech and 24/7 operations team and we’re highly pleased with the results.

May 19th also created a record trading volume: $241B traded across Bitcoin futures and perpetual products, with $8 billion in futures liquidation.

In the last 10 day Bitcoin Open Interest has lost 42% and reached a 100 day low of $11 billion on May 23rd.

Last week’s shock also brought perpetual swap’s funding rates to stay below 0 (reflecting more shorts than long) for the first time since December 2020, when Bitcoin was below $20,000.

Since the capitulation described above, price volatility calmed down, with Bitcoin’s price ranging between $31,600 to $42,000 per-coin. 

Hopes for higher prices ($100,000, etc…) have been replaced for many by fear that Bitcoin’s bull market had ended, but ironically, Bitcoin’s price is actually exactly where it was when Tesla first announced its involvement with Bitcoin 3 months ago. Thanks for the ride!

Interesting view on-chain

The price drop was correlated with apparent capitulation of short term holders:

The Realized Loss chart below (on the left) shows that May 19th had the largest estimated USD capitulation in the history of Bitcoin: $4 billion in losses were realized in one day.

Abnormality: Previous market cycles produced record Bitcoin Coin Days Destroyed (above), meaning long-time holders were prompted to cash out in size in a rising market. As you can see, since 2019 Bitcoin’s CDD is low. How long will large holders continue to ‘hoard’ their coins?

Last Thursday, Bitcoin mining difficulty increased by 21.53%, the largest increase in percentage terms since June 2014. According to Arcane Research, Block creation is now back to the standard 6 blocks per hour, after being well above 7 last week (following the temporary hashrate drop). After the recent news on China’s possible mining ban, the next weeks’ hashrate will be interesting to follow.


News & links

  • Netherlands court dials back excessive KYC law for cryptocurrency exchanges after a case brought by a local company

  • PayPal to allow Bitcoin withdrawals in addition to purchase

  • ARK investments files 639,000 shares in Grayscale’s Ethereum fund

  • Financial innovation: Paradigm presents Everlasting Bitcoin Options

  • Crime: Six arrested in in Israeli-Bulgarian scam-exchange crackdown which drew $36.6 million, Cuba’s Central Bank publishes warning of cryptocurrency backed ponzi schemes 

  • CryptoTwitter livestream raised $800,000 in Ethereum to help child cancer survivor

  • Chinese firm running BTC.COM mining pools invests $25 million in Texas mining facility

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