Was that the cause of Bitcoin's recent price drop?
On April 22nd mainstream media outlets reported gleefully that after consistently climbing to ever greater high prices since the start of 2021, around half a trillion dollars was wiped from the value of cryptocurrencies, when Bitcoin's price dropped beneath $50,000 for the first time this year. Crypto skeptics and naysayers rushed to wheel out the same, tired arguments against Bitcoin:
- That this is a sign of an awakening amongst the world that Bitcoin has nothing underlying it to give it value.
- That it's volatility makes it useless as an asset, a store of value or a currency.
- That it's voracious appetite for energy makes it socially irresponsible.
These are the same well-worn tropes and fallacies that most who've taken time to research and understand Bitcoin know to be incorrect, or at the very least, frail and tenuous arguments.
Possible reasons for the price drop?
There were a number of reasons that could have actually played a part in the drop in value, rather than signaling the beginning of the end for Bitcoin.
Nasdaq reported a drop in computing hashrate (the computer processing power that sustains and maintains the Bitcoin network and which supports mining of new Bitcoin). This was caused by enforced electricity blackouts in North West China. More than 50% of Bitcoin mining is carried out in the Xinjiang and Sichuan regions of China and this could have temporarily lowered the price as demand dropped.
The long-awaited Coinbase IPO was also considered by some as being a factor that could have lowered the price of Bitcoin. While the floatation of the largest crypto exchange was generally deemed successful, there's a case that those choosing to invest in Coinbase could effectively dilute demand for Bitcoin resulting in the price of the asset dropping.
In 2021, institutional investors like Tesla and MicroStrategy have played a significant part in creating upwards pressure on the price of Bitcoin. While it's anticipated that other corporations may follow suit, placing portions of their treasury in crypto, a slightly more risk-averse strategy might be to invest in Coinbase rather than in Bitcoin itself. It's a theory of course, but perhaps one that'll only be tested in coming months. Nonetheless, it could have reduced Bitcoin's price, theoreticially as demand reduced?
Source: Twitter - Michael Saylor, CEO of MicroStrategy
A final speculative reason for the price drop was the latest Crypto Token to be launched - SafeMoon - whose price was being relentlessly pumped, causing hype and bluster amongst a few enthusiasts hoping to get rich quick. While such events do make a few people wealthy, the knock on effects often reduce the price of more credible cryptocurrency as some buyers conflate Alt-Coins with Bitcoin and decide to sell off their holdings out of fear that they're about to be scammed. You can learn more about SafeMoon here if you're interested.
There are likely many other reasons for the drop in Bitcoin's price - some more legitimate than others no doubt.
But on April 26th another more significant factor emerged that seemed relevant.
When Elon talks, Bitcoin listens
It's widely accepted by the cryptocurrency community that certain influencers and meme-artists carry weight in shaping public opinion regarding Bitcoin. This can be both a blessing and a curse, but it is what it is.
Elon Musk is one such character. His actions on Twitter are renowned for having effects on price, but it's not mere bluster whose effects are magnified by his wealth and influence. He's fundamentally a Bitcoin fan, investor and supporter of cryptocurrencies more generally. A believer.
When he changed his Twitter Bio to simply read 'Bitcoin' the price spiked a little. When he announced that his company, Tesla was investing $1.5 Billion of its corporate treasury and that its cars could soon be paid for in Bitcoin, the price spiked a lot. When he makes posts about DogeCoin, another cryptocurrency that started as little more than a joke amongst its founders, the price of that soars too.
Source: Twitter - Elon Musk, Dogecoin fan
A large sale of Bitcoin
When it came to light yesterday that Elon was associated with the sale of $270 million of Bitcoin, reactions amongst the media and Bitcoin maximalists on social media were extreme. The move drew skewed analysis and criticism from some, and panic from others.
Some took it as a sign that Musk had simply been pumping the price of Bitcoin for his own benefit so that he could then sell it off as a profit. Others took it as a desertion by one of Bitcoin's biggest advocates. It seemed a willful and neglectful move to abandon the principle of HODL that's so dear to crypto investors, who are keen to shake-off associations with get-rich-quick fiends who prefer day-trading.
Dave Portnoy, the vocal owner of Barstool Sports made his thoughts clear on Twitter:
Source: Twitter - Dave Portnoy
His assertions must have struck a chord with Elon Musk who was quick to respond:
Source: Twitter - Elon Musk
The reality - Elon is still HODL-ing along with the rest of the Bitcoin maximalists. It is actually Tesla who sold some Bitcoin, for a variety of reasons that now seem quite positive.
Tesla sells Bitcoin and proves a point
Tesla's decision to sell 10% of its Bitcoin holding was a calculated move that injected $101m to its bottom line ahead of reporting quarterly figures. The sale served a purpose for Tesla helping them report strong results in spite of facing long term production issues while being hindered by the global shortage of microchips. Other manufacturers are struggling with this issue too and some have had to temporarily cease production.
The supply chain issues - which Musk reported as having caused "insane difficulties" - together with global shipping and docking problems the world over as the global economy recovers from COVID-19 are factors that make it beneficial for large corporations like Tesla to have easy access to treasury funds.
These factors were relevant to Tesla in choosing to liquidate some of its Bitcoin holding - funds that have increased significantly in value since Tesla invested in Bitcoin when it was priced in the mid $40,000 range and which reached in excess of $60,000 earlier this month.
As Musk pointed out above in his response to Dave Portnoy on Twitter, the rapid liquidity of Bitcoin has now been proven at scale too. This will inadvertently benefit holders of Bitcoin since it demonstrates a further strength of the cryptocurrency as a store of value. It has a clear potential to appreciate in value, and furthermore can be easily liquidated when the holder has a need to access traditional currency for their business or personal needs.
Consider that other conventional investments such as gold in particular, but also bonds, shares and other deposits could not be sold and the funds made available in as short an amount of time. That is another strength of Bitcoin.
What happens next
As always happens in the world of Bitcoin, there will be increases and decreases in its value. Each increase will draw new investors to invest, while each decrease will cause those who were tentative to begin with to sell their holding. The decreases will also prompt the usual criticisms from skeptics who are waiting for the price to drop to zero, for good.
In the meantime, events like Tesla holding and liquidating some of its treasury holding as a means of footing business costs demonstrates yet again that Bitcoin does have genuine utility in the world of finance and business.
Long may Elon Musk continue to blaze the Bitcoin trail!