Holding On for Dear Life: HODLers Brace for Continued Turbulence
Bitcoin is back in the news, but this time for losing more than half its value since its peak in mid-April. The major cryptocurrency saw an increase in volatility last week, breaking multiple support levels and testing the $30,000 mark. An almost immediate bounce back above $40,000 was short-lived and a fresh round of selling ensued, with the price falling back down to around $32,000 on Sunday. As Bitcoin tries to recover its recent losses, and as traders try to navigate their way around the recent market developments, Bitcoin was seen early Wednesday pushing the $40,000 mark once again. Let’s take a look at what’s driving the cryptocurrency market at the moment. People’s Republic of Centralized Control A major catalyst for the recent turbulence was Chinese institutional officials banning financial firms from offering crypto-related services to clients. Having been Crypto-averse since 2013, China hopes to protect its yuan as fiat currency and has also cited carbon emissions produced by coal-fired power plants as a reason for banning inefficient mining operations. The increased regulation and further tightening of restrictions on mining and trading caused the Bitcoin price to dip. IRS Tough Love Even the Internal Revenue Service (IRS) got in on the action last week. On May 20, the Treasury Department released a report proposing new reporting standards for transactions. The proposal would require cryptocurrency transactions of more than $10,000 in value to be reported to the IRS. Both the IRS and the Treasury want tighter controls around crypto transactions to counteract the possibilities of illegal activity and tax evasion. Building tighter controls over cryptocurrencies may temporarily damage their values in the short-term, but over time, will provide them more legitimacy as an asset class. Elon the Influencer Speculative digital assets have been on a constant price action rollercoaster ride, seeing massive swings in both directions. Elon Musk has been a vocal proponent of Bitcoin, however, his recent back-and-forth on certain matters shakes investors with each tweet that he sends out. In February, Musk tweeted that his electric car company, Tesla, would start accepting Bitcoin as payment and that the company would also be making a $1.5 billion investment in the cryptocurrency. The BTC price exploded with the excitement of this kind of institutional involvement. However, after only three months, Musk has reversed course and announced that Tesla would no longer be taking Bitcoin as payment for its vehicles, citing environmental concerns regarding the mining of Bitcoin. There were even murmurs of Tesla selling its Bitcoin position. The fact that Elon Musk, one individual, has the ability to swing global sentiment of the cryptocurrency market with infrequent single-word tweets is seriously detrimental to this asset class’s ambitions of becoming a legitimate store of value, or to being adopted as stable currencies at all. Musk eventually retraced his steps and cleared up rumors of Tesla dumping its Bitcoin position, but the damage had already been done. Additionally, the mere fact that his tweets shift the price action potentially delegitimizes Bitcoin as a credible entity, regardless of whether he backtracks on their context or not. Unfading Trading Drama Coinbase Inc. (COIN) went public on the NYSE to much fanfare, bringing with it rising crypto prices in anticipation of the “mainstreaming” of crypto to the stock market. Unfortunately for Coinbase, its IPO coincided with Bitcoin’s mid-April peak and has trended downward along with the cryptocurrency. There are multiple public companies whose fates seem tied to Bitcoin, notably crypto miners Riot Blockchain Inc. (RIOT) and Marathon Patent Group (MARA). Another public company entrenched in the Bitcoin saga is MicroStrategy Inc. (MSTR). In a report published by Mark Palmer of BTIG, it was noted that the CEO of MicroStrategy had stressed that Bitcoin was an “institutional-grade safe haven in the face of rising monetary inflation.” Palmer also mentioned that the intense levels of volatility are what investors must endure if they wish to receive the level of outperformance over the S&P 500 that it has achieved over the last decade. However, Palmer did outline in a “Downside Scenario” in which the price of Bitcoin could significantly decline and would surely tarnish MSTR’s stock price. If the recent breakdown of Bitcoin and cryptos is to continue, it has been hypothesized that the bearish trend may spill over into other speculative assets, potentially affecting tech stocks. Current Crypto Condition For the time being, Bitcoin appears to be holding between $37,000 and $40,000, and its new resistance level sits around the $42,000 mark. Those bullish on Bitcoin claim that it has broken down to its technical support line around $30,000 and that everything that has happened so far is fully logical, at least for those invested for the long haul. With the $42,000 level in mind, breaking out above that resistance could trigger a rally. However, those less optimistic could argue that short-term investors who were fortunate enough to pick up some Bitcoin around its recent lows, may be looking to take some profits once the Bitcoin reaches $42,000 and that further consolidation might be expected over the near-term. To learn more about other cryptocurrency stocks, check out the TipRanks Cryptocurrency Stock Comparison tool.