Cryptocurrency crash: Is there an end in sight?

• Bitcoin (USD) price sinks to a five-month low of US$31,227 on Sunday (23 May 2021)
• Ethereum (USD) price was down nearly 27% at one point during the sector-wide selldown
• BTC’s implied volatility sat at over 130, far surpassing the US stock market’s peak volatility of 82.69 recorded last March
• One analyst said crypto’s current volatility can be attributed to the recent spate of ‘noise’ and negative news being accompanied by a ‘huge amount of speculation’
• Buy and sell BTC, ETH, XRP, LTC and other cryptocurrencies with an IG account

BTC, ETH price: What happened on Sunday?

The cryptocurrency market continues to be heavily plagued by volatility, as double-digit percentage changes took place across most digital currencies over the weekend.

The whiplash saw bitcoin (BTC) plunge as much as 18% to a five-month low of US$31,227 between 14:00 SGT and 17:30 SGT on Sunday (23 May 2021).

Ethereum (ETH), the second largest digital currency in the world, was also down nearly 27% at one point during the same time period.

Other cryptos, including the likes of Litecoin (LTC), Ripple (XRP), Cardano (ADA) and Dogecoin (DOGE), lost over 10% of their market capitalisation at the peak of the selldown as well.

A comparison of BTC’s implied volatility with the US equity market’s Volatility Index, or VIX, stood at above 130. This is well above the VIX’s 30-year high of 82.69 - recorded on 16 March 2020.

This run of form started over a week ago following a string of negative headlines, starting with Tesla’s Elon Musk saying that the electric vehicle maker will no longer accept BTC as a form of payment for its products due to the coin’s excessive energy use.

That sent prices into a downward spiral, crashing nearly 15% between 12 May 2021 and 13 May 2021.

The crypto market then suffered another blow, after Chinese authorities - notorious for its unsupportive stance towards digital currencies - banned financial and payment institutions from providing cryptocurrency services. They also issued a warning against speculative crypto trading.

A tweet from Musk the following day that BTC is still worth holding onto managed to stop the bleeding for two days. But bearishness quickly overruled recovery sentiments once again, leading to the current price suppression.

What do analysts think of the current bearishness?

‘It is no surprise that governments are not inclined to give up their monetary monopolies. Throughout history, governments first regulate and then take ownership,’ Deutsche Bank analyst Marion Laboure wrote in a 20 May report titled ‘Bitcoin: Trendy Is the Last Stage Before Tacky’.

‘As cryptocurrencies begin to seriously compete with regular currencies and fiat currencies, regulators and policymakers will crack down.’

Philip Gradwell, chief economist at Chainalysis, said that the stakes are ‘much higher now than they were in the past’ as this most recent price fall means that ‘a lot of investments are now held at a loss’.

‘This is going to be a serious test for recent investors, but so much is at stake now that there is the incentive and resources to address the problems in crypto that prevent it from becoming a mature asset,’ he told Bloomberg.

Penn Capital’s chief investment officer of equity, Eric Green, said that crypto’s volatility is due to ‘noise’ being accompanied by ‘a huge amount of speculation’, adding that ‘what goes straight up is going to come down at some point’.

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