Bitcoin has finally bounced back, cleanly breaking the $50,000 barrier to trade at around $57,000 at the time of publishing. This signal comes as much-needed relief for bulls after the entire crypto market slumped for two weeks following the flash crash on Feb. 22, now known as “Bloody Monday.”
The market slump seemed to persist despite the rising demand and confidence in the cryptocurrency markets both from retail and institutional investors. A blog post published by Robinhood, a trading platform often used by Gen Z and millennials, titled “Crypto Goes Mainstream” mentioned that the platform saw over 6 million new crypto users in the first two months of 2021 alone. Considering that monthly sign-ups in 2021 are 15 times the 2020 average, this is highly indicative of the shift in perception of retail investors toward cryptocurrencies.
The dip in the market led Bitcoin (BTC) to hit a low of $43,700 on Feb. 28, which is 25% below the all-time high of $58,352 it hit on Feb. 21. Considering that these milestones are only seven days apart, the volatility in price seems extraordinarily high, especially to all the new crypto investors who rode the wave during the bull runs earlier in 2021 and in late 2020.
Seasoned investors are often aware of — and wary of — the fact that such price corrections happen in the financial markets, even in the stock market. An instance of this was recently witnessed in the case of Tesla’s stock, which went through a major price correction of 11.4%.
Price plummeted despite a rise in demand
Such price corrections are often natural for financial assets that have long bull runs and value multiplications within a few months, as seen in the case of Bitcoin. Institutional investors, which are often staunch believers of their long positions due to the value proposition that their investment could offer in the future, wait for such price corrections to sweep up more Bitcoin. However, due to the bureaucratic nature of large organizations, there are often several obstacles they have to overcome for them to eventually invest.
Jay Hao, CEO of crypto exchange OKEx, told Cointelegraph that price pullbacks are to be expected given the early stage of the bull run. Most public institutions will need to justify their purchase of Bitcoin to investors in addition to board members, thus the appropriate due diligence and justification for the allocation percentage in their portfolios will be in order.
Because bringing crypto onto a balance sheet could be a time-taking process full of obstacles, Hao thinks that some institutions may be discouraged: “Many more still consider that with its market cap below $1 trillion, it’s not yet a large enough asset class to invest in, others are put off by its volatility.”
In support of this theory, there are institutional investments coming in from firms led by influential business leaders such as Jack Dorsey and Michael Saylor. Square was the first large institution to buy the dip, adding 3,318 Bitcoin to its holdings on Feb. 23, worth around $170 million at the time. Considering that more than 80% of Square’s revenue in the third quarter of 2020 came from Bitcoin, this move seems like a no-brainer.
MicroStrategy CEO Saylor also announced on Feb. 24 that the firm had purchased another 19,452 Bitcoin, worth around $1 billion at the time. The next week, on March 1, he revealed that the firm had bought another small lot of 328 Bitcoin, worth $15 million at the time. According to data from Bitcoin Treasuries, MicroStrategy now owns a total of 91,064 BTC, worth nearly $4.6 billion. This is, in fact, 74% of the company’s market capitalization. Hao further opined that such an allocation might not be as easy for other institutions:
“We are seeing more institutional custodial solutions like BNY Mellon being developed but they will be coming later on in the year. It takes time. It’s not as simple for most institutions to simply decide to buy BTC like Michael Saylor. Most have to go through strenuous processes first and I think that is partly the reason for this pause.”
Considering that the most notable Bitcoin price correction happened on March 12, 2020 — also known as “Black Thursday” — this most recent price dip may reflect the cyclical nature of the asset. Shane Ai, who is responsible for product research and development of crypto derivatives at Bybit — a cryptocurrency derivatives exchange — told Cointelegraph: “Historical price seasonality doesn’t favor Bitcoin in March. Knowing this, traders would exercise more caution getting long.”
This price seasonality is evident in the Crypto Fear & Greed Index as well. According to the index, the value “0” indicates extreme fear and “100” indicates extreme greed. Historically, the index falls to lower levels in March compared with the year’s pre-March levels.
Canadian Bitcoin ETFs provide momentum
Amid the market dip, North America’s first two Bitcoin exchange-traded funds, or ETFs, were launched in Canada. Even though the market was in a slump, both of these ETFs have proved to be popular. The first ETF to launch was from Purpose Investments on Feb. 18. In a short timespan, Purpose’s ETF has already amassed $836 million in assets under management, representing 12,158 BTC.
Soon after the first launch, Evolve Fund Group’s Bitcoin ETF was also launched in Canada after getting the necessary approval. The ETF currently has nearly $65 million worth of Bitcoin in its fund. In fact, to rival Purpose’s quick growth, Evolve started a price war with Purpose by lowering the management fee on its Bitcoin ETF to 0.75% from 1%. Currently, the Evolve ETF’s assets under management are less than 10% of those of the Purpose ETF.
ETFs are a basket of assets — in this case, Bitcoin — that are traded on an exchange, just like stocks. ETFs are often the channel that institutions use to get exposure to certain assets due to the higher liquidity and tighter spreads they provide. Bitcoin ETFs doing well despite the market dip is yet another indication of the fact that institutions consider the latest dip to be a healthy correction and an opportunity to buy some more Bitcoin at a lower price.
New investors show weak hands
The crypto bull run during the first quarter of 2020 and running into the first two months of 2021 brought a lot of new investors into the cryptocurrency markets. However, some of the investors have been lured into the asset class due to the extraordinarily high returns that it gives when compared with traditional investments like equities, commodities and bonds. But these investors are not used to the volatility in the cryptocurrency market.
Due to this, there were large sell-offs in the BTC market when the price hit $44,000, as evident in Coinbase’s outflow data. Hao elaborated on this phenomenon: “Many new investors are rattled by the volatility and we often see this type of panic selling when a swift price correction comes in.” He added further: “We will continue to see weak hands being shaken out of the space as the price stutters and corrects on its way up.”
Another possibility is that new investors could be selling some of their Bitcoin at a profit to invest in altcoins instead. The marketwide sell-off reared its face even in the Bitcoin derivatives markets, as was evident in Bitcoin futures daily volumes and the associated open interest, or OI. During the dip, Bitcoin futures OI dropped more than 20% from its peak just before the dip.
The OI of the futures market measures the flow of money coming into the market. A 20% drop in OI speaks to the negative sentiment that has crept into the market due to the price dip. At the same time, it’s also important to note that the market rose up to its all-time high market capitalization much faster than was expected by the community. Thus, in hindsight, a pullback was to be expected with a healthy correction.
Whether the dip was caused by weak hands selling or it was just a healthy price correction as the markets cooled off after hitting their peak earlier in February, it has become clear that institutions aren’t deterred by this volatility. It seems they welcomed the drop in price, as it enabled them to buy the dip and own more Bitcoin bought at a lower price than what is considered to be its true value at the moment.