Crypto Digest, Special Drop
When we thought we were about to send Crypto Digest #3, a tidal wave started. And when we were wrapping up this Special Drop, we got yet another surprise. Interesting times ahead.
We were probably more than halfway through writing our next newsletter, with nice pieces about scalability, "Robin" Vitalik "Hood", and NFTs when the earth began to crumble under our feet. This has been one of the most intense weeks in crypto. A new chapter of its history is being written. We’re still in the middle of the turmoil, but the dust has settled down enough for us to bring forth a little summary. While we wait for time to bring a clearer picture, this is what we can say.
Everything seemed to start with Elon. Tesla sent a very powerful message to corporations and traditional investors when they purchased $1.5B worth of bitcoin for their treasury and announced people could pay their electric cars in bitcoin from now on. Crypto got an endorsement from a man whose comfort zone is the frontier between traditional business and radical disruption. Who else could be crypto's Cicerone? Right in the middle of a bull run, Bitcoin got yet another boost.
But just a couple of months later, Musk Darth Vadered on the bitcoin community. Citing environmental concerns, Tesla announced they would no longer accept bitcoin, although they would keep BTC in their treasury. And what started with a polite explanation ended up in a few ranting tweets by the "technoking of Tesla, imperator of Mars" in response to criticism from celebrity bitcoiners.
Fear, uncertainty, and doubt ensued.
Just a few days later, Chinese authorities issued a statement banning financial institutions and payment companies from providing services related to crypto, claiming to defend the interest of consumers from the volatility of the assets.
“Recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,” read the statement.
A closer look left several questions. Any institution did not clearly sign the statement, and it hardly added any new information to the status quo in the Asian giant. China has a love-hate relationship with crypto (who doesn’t). They appreciate the power Bitcoin wields over the dollar, but they dislike how it helps avoid capital control. Whatever the reasons, the timing seemed odd.
The US had something to say too. Both the Securities Exchange Commission and the Treasury added more fuel to the fire with their respective statements. Through their Division of Investment Management, the SEC said that "investors should consider the volatility of Bitcoin and the Bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying Bitcoin market."
The Treasury, for its part, said "it will require any transfer worth $10,000 or more to be reported to the Internal Revenue Service" to hamper tax evasion.
Neither of these measures is inherently bad, but they both added more regulatory pressure during a time of big hesitation.
But then China delivered a final blow:
Chinese Vice Premier Liu He told a group of finance officials on Friday that the government would "clamp down on bitcoin mining and trading activity" as part of its goal to achieve financial stability. The government didn't elaborate on specific policies targeting mining or trading.
Until this point, the whole crisis felt like it could have been just the market's overreaction to negative news. Some fundamental blockchain metrics, like active wallets or NVT price and ratio, showed good health despite the drop. It seemed like we were in the middle of a massive hiccup, brought by a perfect storm made of bad rep and looming regulatory pressure.
But China's potential ban on mining changes everything. And regardless of whether the threat becomes a reality or not, the market can already feel the effects. Chinese miners are already reacting, with huge operations migrating and expensive hardware being sold.
In the long term, this would be undoubtedly positive news: Most of the miners are based in China, and a ban there would improve decentralization. Furthermore, the concerns about energy emissions (back to you, Elon) also play a role, with miners moving away from carbon-heavy markets.
In the short term, things are yet unclear. China’s announcement led Chinese miners to panic sell, and cryptocurrencies were from 30 to 50% down this past Sunday. People started to say it was clear the bull market was over, that we didn’t learn anything from the 2018 crash. Then, yesterday every cryptocurrency skyrocketed, recovering from 25 to 75% in a matter of hours, and euphoria has returned to the market, with most investors claiming the bull market is resumed and forecasting BTC at $100k and ETH at $10k for this year.
Our opinion? It’s too early to tell. The market has recovered in just a day from one of the biggest sell-offs of Bitcoin’s history, so we feel optimistic. But at the same time, if Chinese miners have to quickly sell their holdings to avoid capital controls or even jail, we are sure we will see another bloodbath. If you are in crypto for the short term, you'd better be ready for turbulence.
Speaking of turbulence, just when we were reviewing this issue Elon Musk has just shown the carrot again. There is no way to consider a newsletter finished with this guy…
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