Bitcoin, Ethereum, and other cryptocurrencies have had a crazy few weeks.
Price fluctuations aren’t new to crypto, but with new mainstream acceptance there are issues with volatility.
Insider spoke with cryptocurrency experts to see how the recent “stress test” affected the community.
On April 11, 2021, the price of Bitcoin rose to $ 63,729.50 as the excitement surrounding the crypto market increased.
Coinbase, one of the largest cryptocurrency exchanges, was ready to go public in just three days, and Tesla had said it would start accepting bitcoin as a form of payment for its vehicles.
A month and a half later, bitcoin is trading below $ 40,000 per coin, Tesla is no longer accepting Bitcoin, and the Coinbase stock is down about 30% of its all-time highs.
For those new to the crypto world this kind of volatility can be disturbing, but for old ones it is nothing new.
In fact, bitcoin experienced six declines of over 30% in 2017 alone, despite the price rising over 1,000% that year.
Nonetheless, given the rapid growth of new cryptocurrency holders and an increase in institutional interest in the space, increasing volatility may be an issue.
Below, Insider explains how the Crazy Few Weeks in Cryptocurrency have affected the industry.
From miners to DeFi companies, the crypto community has been forced, once again, to navigate price swings. Here’s a look at how they performed according to the experts.
Traders and investors
Some short-term traders and long-term investors have been greatly affected by the recent fluctuation in bitcoin prices, but for others, business has gone as usual.
Most of the pain caused by falling cryptocurrency prices was felt by newcomers to the space looking to make a quick buck by trading, but ended up selling coins at a loss.
According to Glassnode data , “there is no doubt that much of the recent spending has been driven by short-term holders, those who own coins purchased in the past 6 months.”
Insider spoke to Todd Jones, the chief investment officer of wealth management firm Gratus Capital, to confirm Glassnode’s findings.
Jones said none of his long-term-focused clients had sold their cryptocurrency and noted that much of the bitcoin price selling was the result of ‘loosening leverage’ traders.
Chain margin traders rushed out of their leveraged positions when cryptocurrencies faced their most recent bout of volatility, according to a Daily Gwei from May 19. bulletin.
Ethereum gas fees (the fees necessary to complete an ethereum transaction) have reached record levels, resulting in “gas wars between liquidators and arbitrageurs,” according to Delphi Digital.
“The price was dropping so fast that people were scared for their leveraged positions on the chain and were willing to pay anything to get their transaction included in the next Ethereum block (probably to close their positions),” Ethereum developer Anthony Sassano speculated via Coin- operated Telegraph .
Bitcoin traders using up to 100 to 1 leverage also rushed to sell, increasing the volatility of the asset.
This leverage has added to the woes of cryptocurrencies. However, for long-term holders of ether and bitcoin, falling prices and rising gasoline costs were irrelevant.
Essentially, the latest bout of volatility affected traders far more than long-term investors, who still believe their holdings will enjoy moving forward.
“The recent price volatility shouldn’t have a very big impact on a long-term holder of BTC. It comes with the territory. Any asset that can grow 800% in a year also has the potential to collapse 90% (as the early days of price volatility goes hand in hand with speculative assets, “said Todd Jones of Gratus Capital.
In Jones’ view, now is the “right time to add” cryptocurrency holdings as part of a diversified portfolio.
Minors
Cryptocurrency mining, and bitcoin mining, in particular, has become a multi-billion dollar business. Publicly traded miners like Riot Blockchain, Marathon Digital Holdings, and Beehive Blockchain have expanded their operations amid a meteoric race for the crypto space.
However, like all mining operations, the value of the end product is critical to ensuring profitability.
Insider spoke with Phil McPherson, vice president of financial markets at Riot Blockchain, to explore how fluctuations in cryptocurrency prices can affect miners.
McPherson said when the price of bitcoin drops, miners may be forced to sell coins in order to continue their operations. The key is the mining cost per part, which varies widely by company.
“Smaller miners with higher fixed costs and higher freight costs would likely be more affected,” McPherson said.
The VP added that his company is in a “unique position” due to its strong balance sheet. Riot ended the first quarter with $ 241 million in cash and an average cost per coin mined of around $ 15,000, allowing them to hold onto all the bitcoin they mine and continue to operate even in a bear market for the. digital asset.
“On a daily basis we mine, call it six or seven bitcoins a day, sometimes it’s higher, sometimes it’s lower, but we don’t sell that bitcoin, we stack it,” said McPherson. “So just being bullish in the long run, the price volatility hasn’t affected our business from a financial standpoint because we’re not selling it in this depressed market.”
McPherson noted that when the price of bitcoin drops, the global hash rate (the difficulty in mining currency) also drops, which is actually a benefit for miners who can stay in business.
“From our perspective, volatility has in some ways been beneficial for market leaders like us,” added McPherson.
Challenge
Decentralized Finance, or DeFi, is a system that allows users to access financial products over a public, decentralized blockchain network.
Most DeFi companies use the Ethereum blockchain to run their operations, and the total value locked into the DeFi network now exceeds $ 62 billion, according to data from Defipulse.com.
DeFi applications include stablecoins, lending platforms, prediction markets and more, and the sector allows traders to take advantage of tactics like yield farming and liquidity extraction.
Jeff Dorman, CFA, chief investment officer at digital asset management firm Arca, told Insider that recent cryptocurrency volatility was a “real stress test” for the DeFi space.
According to the CIO, DeFi companies passed this last test without a problem, but in the past this was not always the case.
Dorman pointed out the differences in the DeFi system amid recent price swings compared to volatile periods of the past.
The IOC gave an example of MakerDao, a popular DeFi lending and borrowing platform, which “essentially erupted” in March of last year when the crypto market saw a sharp drop in prices and collapsed. was forced to take $ 4.5 million in socialized losses from the event.
“There were pricing feed issues with respect to their API connectivity, and as a result borrowers were liquidated when they should not have been liquidated due to a pricing issue. MakerDao had to socialize these losses and raise new funds and reimburse all the victims over time, ”said Dorman.
This time, however, was very different depending on the CIO.
“This time it was exactly the opposite. I can’t give you an example because nothing happened. Every price oracle worked, every decentralized exchange worked, every decentralized lending and borrowing platform worked, every decentralized insurance company worked. I mean, it was amazing to see, ”Dorman said.
The IOC pointed out that centralized entities in the crypto world like Coinbase and Binance “all had issues” with price volatility this time around. DeFi companies, on the other hand, were able to navigate price fluctuations without any problem.
DeFi’s liquidations increased 14-fold during the crypto sell-off, according to data from Debank, as space traders sought to hedge against losses.
However, at the end of the day, the crypto community was able to quite impressively determine the recent price drops and volatility.
Some traders, especially those using excessive leverage, have been affected, but overall the industry has continued to trucking in what will likely be seen as a positive sign for the future of the space.
