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Institutions are cautious buyers but not sellers as crypto prices plunge

19 May 2021
SUMMARY SUMMARY
    • Cryptocurrency prices have plunged, with bitcoin falling as low as $36k and Ethereum as low as $2,200. Elon Musk may have started, and stopped, the fall but a decline of this magnitude demonstrates that other buyers have concerns, potentially after hoping for more robust answers to questions about environmental impact, use cases, illicit activity and regulation, now they see crypto as a mainstream asset.
    • This is unlikely to be the end of the bull run. Prices are historically high and much more is at stake than in past price declines. $410 billion has been spent to acquire current bitcoin holdings. $300 billion of this has made a loss at a price of $36k, but the remaining $110 billion in profit is greater than all that had been spent to acquire bitcoin in mid-March 2020, the last major price fall.
    • Bitcoin inflows into exchanges are relatively low compared to past sell-offs, at 412k bitcoin in the last three days, compared to 412k on the 13 March 2020 alone, while investor whales bought 34k bitcoin on Tuesday and Wednesday, 18 and 19 May, after reducing their holdings by as much as 51k bitcoin in the last two weeks. This suggests much of the selling pressure is occurring from sellers already on exchanges, likely retail.

Cryptocurrency prices have plunged this week, falling by 30% or more. The bitcoin price was as high as $58k on Wednesday 12 May. Today, Wednesday 19 May, it has reached as low as $36k, although it is now recovering towards $40k. The Ethereum price reached an all time high seven days ago, of $4,308 but approached as low as $2,200 today before recovering above $2,800.

If you cannot bear to read any further, you can now listen to the Market Intel Report as a podcast! Today we also launch the archive of all past Market Intel Reports, so you can go back to reading about when prices were rising…

The end-of-day bitcoin price has only fallen by more than 25% over seven days on four other occasions since the start of 2017. These were: 

  • 24 December 2017, when the price fell from the $20k peak of the 2017 bull run;
  • 5 February 2018, when the price fell below $10k as the bull run ended;
  • 25 November 2018 when the price went to $4k as crypto winter set in; and
  • Mid-March 2020, when the price touched as low as $4k as financial markets reacted to Covid. 

So the current price fall is very significant, although the price level, for both bitcoin and Ethereum, is still historically high.

Last week I wrote: ‘the market is hot right now’ and that ‘if you are not playing a very long game in crypto, you probably should be playing a very short game’ as the question is ‘will the scale of investment and interest advance technology and adoption enough to sustain prices, before hype wanes and Fear Of Missing Out turns into Fear Uncertainty and Doubt?’. 

It now looks like the heat I felt was the market overheating. I worried about how short the very short game would be. I just didn’t think it only had a day left to run, but then Elon Musk hit the accelerator. However, I think that Musk is just the messenger, even as his diamond hands seem to be lifting up the price right now.

When Coinbase went public, I wrote that it was ‘the end of the beginning for crypto but new growth needs uses beyond trading’. Since then, people have been asking hard questions because crypto has matured into an asset that people have made serious investments in. Crypto faced questions before, but they were largely a mix of curiosity and cynicism. Now, the industry needs to answer questions about environmental impact, use cases, illicit activity and regulation. I provide answers in the links, but the depth of this week’s price falls show that more needs to be done to keep the investment coming in. Elon Musk can clearly drive price volatility, but the sell-off is large enough to demonstrate that other buyers have concerns.

So is this the end of the bull market? Is crypto winter coming? I don’t know, but I also don’t think so. Things are different from major price declines in March 2020 and December 2017 as I’ll show in the charts below. While buyers’ concerns may have risen recently, there are many recent entrants who have bought large amounts of cryptocurrency. The stakes are much higher now than they ever were. 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.

To understand just how much higher the stakes are now, consider the cost curves in the first chart of the Report. You may ask: how is cost curve analysis doing right now, as price falls below multiple support levels? For me, cost curves provide a floor where price should settle, not when the market panics. Today it looks like the price may settle around $38k, which actually is a plateau on the current cost curve…

But the main insight I draw from comparing the current cost curve with the cost curves in March 2020 and December 2017, is just how much more has been invested in bitcoin since those times. $410 billion has been spent to acquire current bitcoin holdings. $300 billion of this has made a loss at a price of $36k. However, the remaining $110 billion in profit is greater than all that had been spent to acquire bitcoin in mid-March 2020, the last major price fall. These are some serious incentives to resolve problems that people may have with cryptocurrency and to invest in improvements.

It also does not appear that institutions are significant sellers, although they may be more cautious as buyers right now. The second chart in the report shows that bitcoin inflows into exchanges are relatively low compared to past sell-offs, at 412k bitcoin in the last three days, compared to 412k on the 13 March 2020 alone. This suggests that much of the selling is from people with assets already on exchanges, which tend to be retail investors.

The third chart in the report strengthens this view. It shows the change in bitcoin held by post-2017 investor whales for the 14 days before the price bottom of the current and past declines. Post-2017 investor whales are self-hosted wallets that have held at least 1k bitcoin in their lifetime, acquired this since the start of 2017, and who retain at least 75% of the bitcoin they receive. The chart shows that investor whales bought 34k bitcoin on Tuesday and Wednesday, 18 and 19 May, after reducing their holdings by as much as 51k bitcoin cumulatively in the last two weeks. This is a stronger response than in March 2020. So investor whales currently appear cautious but low prices may be tempting them to buy the dip, rather than sell into it.

And talking of buying the dip, I’ll be presenting at Consensus on ‘Should I Buy the Dip? The On-Chain Answer‘ on 25 May at 9:05pm EST. In the meantime, I’m sure I’ll be providing updates via Twitter as the market evolves, let me know your thoughts via marketintel@chainalysis.com, and don’t forget you can now listen to the podcast and read the archive of the Market Intel Report!

Philip Gradwell, Chief Economist

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