Crypto Market’s December Dip: A Preparation for a January Jump?

If you’ve been keeping track of the crypto market’s daily movements, you may have spilled your coffee on Saturday, 4 December — if you’re living in Europe, that is. Bitcoin dipped below US$50,000 per coin after hitting a new all-time high of $69,000 just 3 weeks earlier. 

Bitcoin holders have seen the digital gold gently fall from all-time high to about $60,000. While the sell-off after a new all-time high is characteristic of the crypto market, the sudden 15% drop on Saturday must have been a surprise for many people. 

Start from the basics: What is Bitcoin?

Accumulation period has begun

As of Monday, 13 December, Bitcoin is consolidating between the 46k – 51k mark, characterised by low volatility. While the lack of price movement seems unexciting relative to previous bull rallies, many veteran investors see this as a perfect opportunity to accumulate more bitcoin.

The third-largest holder of bitcoin bought more than 3000 BTCs (worth around $150 million at the time) within a few days after the flash crash on Saturday, reports The Independent. To this day, the wallet owner remains anonymous. 

Basking under the media’s light, however, was CEO of Microstrategy (and Bitcoiner) Michael Saylor, who openly announced that his company purchased 1434 more bitcoins, worth approximately $82.4 million. The company’s bitcoin portfolio is now at a floating profit of $2.3 billion, using today’s price of $48,900.

What caused the flash crash?

News has always been the greatest market mover in the crypto space. Firstly, there was uncertainty in the broader financial market due to the outbreak of reports on the Omnicron coronavirus variant. This caused market indices like the US Dow Jones Industrial Average to fall by 2.5%.

One other possible culprit is the news around Evergrande’s bankruptcy. How did a China-based property company’s debt default affect the global crypto market?

Although crypto technology is decentralised and siloed from traditional finance, the crypto market itself is not.

To gloss over the issue in a simplified way, Evergrande has borrowed over $300 billion from various banks and financial institutions around the world.

Some of these financial institutions have had exposure to the crypto market (i.e. they’re big buyers and market movers).

When Evergrande officially defaulted, unable to pay its debts, the lending parties suffered. One of the easiest ways for financial institutions to reduce their risk appetite is to sell their crypto holdings. 

As crypto becomes mainstream in the traditional markets (whether directly as a crypto asset or a crypto-derivative fund), we’ll start seeing these sorts of effects in the crypto market more commonly. 

Why are crypto flash crashes so violent?

Most people who are wary of crypto assets would blame the “crypto whales” and market markers for “pumping and dumping” activities in the market, victimising the retail investors. In actual fact, it’s the leveraged crypto traders who are to blame for crypto’s dizzying volatility. 

Leveraged traders are traders who borrow money in order to increase their risk and reward. This means if the price moves slightly in their favour, they will receive higher returns. They will then return the borrowed money, and enjoy their multiplied profits.

Traders like these usually begin opening their positions as the price of an asset climbs. Due to market momentum and sustained interest in trading that asset, more traders jump in to open leveraged positions.

Leveraged positions often come with automatic “emergency brakes” — technically known as a margin stop. If the price moves too much against a trader’s favour, the position is automatically liquidated at a loss to the traders. Meanwhile, the borrowed money returns to the provider unscatched. 

Because crypto markets are not regulated, an unusual and unexpected price movement can trigger a cascade of margin stops. It’s like a snowball effect — a margin stop liquidates a large position, decreasing the asset’s price, and this triggers another margin stop, lowering the price even further — and so on.

Most veteran crypto hodlers think of flash crashes as a regular mini-cycle of greed and fear coming to an end. If leveraged traders are responsible for inflating the price of an asset, they are also responsible for revealing the true “market value” of the asset.

This means, it’s rarely a mistake to accumulate crypto assets after a flash crash. 

As long as the crypto market remains free of regulator’s control, it’s a free market out there. That is, free in the sense that you are free to do whatever you want — take a risky leveraged position, if you will — but you are also responsible for your own financial well-being.

Learn the basics of crypto trading. Cryptocurrency Technical Analysis For Trading

December has been disappointing, but what’s in store for 2022?

Bitcoin may not surpass the $100,000 price level as many hodlers have hoped. Given that the recent dip has slowed down Bitcoin’s astounding rally in 2021, what is in store for bitcoin and the crypto market in 2022?

There are a few conflicting views on what will happen to crypto in 2022. A great number of investment firms think that cryptocurrencies will likely experience a major correction, according to a survey by Natixis Investment Managers.

However, the result shows that a greater number of them are more concerned about corrections in the stock market, particularly the technology sector. Also, 28% of those surveyed said they will invest in crypto, with 33% of them planning on increasing exposure next year. 

“Corrections” don’t necessarily mean “death”, although it could mean “getting hurt a lot” for those who have bought large amounts of crypto at a high price. 

Ross Gerber, CEO of Gerber Kawasaki Wealth & Investment Management said in an interview with Yahoo Finance said, “Bitcoin and Ethereum are like cockroaches, they’re just not gonna die… Bitcoin and Ethereum have been the best way to play these assets over the long term.” 

He mentioned that he’s seen the crypto market “almost get killed several times”, but only to recover again stronger than ever.

So far this year, we’ve seen regulators and financial institutions becoming aligned to achieve a common goal — make crypto safer and more convenient for retail investors. This includes the approval of exchange traded funds (ETF) backed by crypto assets.

The introduction of investment products based partly or wholly on a single or multitude of crypto assets can give investors more options.

To be fair, not many people would want to use crypto assets as intended — as tools for exchange, to be stored in self-custody wallets, and to be used on decentralised platforms.

Some investors just want to increase their exposure to crypto, without the hassle of storing the asset. Offering more options to a wide range of investors can accelerate adoption in the near future.