Bitcoin Is Bouncing Back. Is the Crypto Swoon Over?

At 11 a.m. Eastern time on Thursday, Bitcoin was trading at $41,800, or roughly the same level where it was on Tuesday at 9:30 p.m. It was up 13% over the prior 24 hours. The new money in crypto may not be as easily rattled as retail investors were in 2017.

Ether, the second-largest cryptocurrency by market capitalization, was up 16% after falling more than 20% on Wednesday. Dogecoin gained 15%, rallying after Tesla (ticker: TSLA) CEO
Elon Musk
tweeted “How much is that Doge in the window?”

Crypto exchange Coinbase Global (COIN) and MicroStrategy (MSTR), which has a large stake in Bitcoin, were up 2.5% and 3.3%, respectively. Shares of both companies fell on Wednesday.

There was no consensus on the cause of the latest drop, though some analysts pointed to China’s renewed crackdown on cryptocurrency trading and mining as one potential catalyst. Musk’s recent mixed messages on crypto haven’t helped either.

“There wasn’t a single catalyst behind the moves, but since its April peak there’ve been a number of headwinds for Bitcoin, and the latest Chinese move on the issue has played into broader concerns that regulators more widely could move to clamp down on the usage of cryptocurrencies, not least following the Colonial pipeline attack which led to a ransom that was reportedly paid for in crypto,” said strategists at Deutsche Bank led by Henry Allen.

Even in the teeth of the plunge, Bitcoin veterans seemed unfazed, given the history of volatility in the asset.

“There aren’t many asset classes where a few $100 billion get wiped off and everyone, everyone goes immediately to Twitter and starts making jokes about it,” said Angus de Champion Crespigny. “For long-term holders of this, market movements aren’t going to touch them. If it goes up, they’re going to be positive. If it goes down, they want to be positive and show that this means there’s opportunity.” Crespigny has been following the space since 2013. He was previously ran the blockchain division specializing in finance for consultant EY, and is now chief technology officer for C|T Group, which does political and business consulting, including on digital assets.

For new crypto investors, the selloff was a wake-up call but one that the market is more likely to weather today than it did in 2017, when a late-December plunge sent prices into a yearslong tailspin. 

“This is unlikely to be the end of the bull run,” wrote Philip Gradwell, chief economist at Chainalysis, which tracks activity on the crypto blockchains. “Prices are historically high and much more is at stake than in past price declines.”

Gradwell notes that $410 billion has been spent to acquire current Bitcoin holdings, and that $300 billion of that would represent a loss to their holders at prices below $36,000. That is a level current investors are likely to try to defend, absent some devastating news for the industry.

One sign he looks for to decipher industry sentiment is how much Bitcoin has been transferred from wallets to exchanges. Large investors tend to move money to exchanges before they sell. So far, less money has been moved to exchanges than in prior selloffs, meaning that institutional investors seem less likely to dump their holdings.

“The on-chain data suggests that retail is selling on exchanges, while institutional investors are just not buying as much rather than selling, although some have started to buy the dip today,” Gradwell wrote on Wednesday.

“The stakes are much higher now than they were in the past,” he wrote. “So much more has been invested in Bitcoin over the last year ($410 billion versus $110 billion) that there is the incentive and resources to address the problems in crypto that prevent it from becoming a mature asset.”

The Bitcoin market is opaque, of course. Researchers like Gradwell can only analyze what they can see. In recent months, experts have blamed drops on unregulated crypto derivatives trading overseas. Those exchanges give investors the opportunity to buy with leverage, and those positions can unwind fast in a selloff as traders are subject to margin calls. 

Unregulated retail crypto trading is a “less important part of the market today than it was four years ago, but it’s still a big part of the market and you can get these big down moves as a result,”
Matt Hougan,
chief investment officer of crypto fund provider Bitwise Asset Management, said in an interview.

Reporting contributed by Steve Goldstein.Write to editors@barrons.com