FXCM's view: Bitcoin bull market pullback is not abnormal, whether the cold winter is coming remains to be seen

In the past 24 hours, almost every major digital cryptocurrency has plummeted, and the market value of digital currencies has evaporated on a large scale. Is the Bitcoin bull market coming to an end? A report released by Gain Capital, a world-renowned financial trading company, said that Bitcoin's plunge in a bull market is normal, and the increase in Bitcoin in the current bull market cycle is still lower than the historical average. Therefore, despite the plunge today, we still need to observe in the future.

Historical data: Large pullbacks are not unusual during bull market cycles

Whenever the market is volatile, taking a step back and looking at historical data can give you a clearer picture. Bitcoin’s current plunge will certainly spook current bulls, but experienced long-term holders know that Bitcoin’s plunges are the norm in bull markets. As shown in the chart below, before the 2015-2017 bull market finally peaked, Bitcoin experienced seven separate retracements of 30% each.

Source: StoneX, TradingView

For reference, the 55% drop from intraday peak to intraday trough is larger than any of the declines in 2016 or 2017, and the current plunge is "only" the third 30% retracement in the current bull market cycle. Also note that at the time of writing, Bitcoin is trading below its 200-day exponential moving average, which Bitcoin prices never fell below during the 2015-2017 bull market.

As we pointed out last month when reviewing Bitcoin price history, Bitcoin's rise in the current bull cycle is still below the historical average. So, despite today's plunge, we still have to watch. Another ratio to watch is Bitcoin's MVRV Z-Score, which measures Bitcoin's market value (market value) relative to the previous transaction price of each Bitcoin (real price). At the peak of previous bull cycles, this ratio always reached 11, while this cycle (so far) has only risen to around 8:

Source: StoneX, Woobull

Of course, there is only so much we can learn from analyzing historical data for an asset class that is only a dozen years old, but the above analysis still suggests that Bitcoin’s current price action is not unusual in a bull cycle, and that prices are still expected to resume their recent upward trend before forming a longer-term top.

In other words, long-term bullish traders do not need to tremble at today's plunge for the time being, and the "winter" of digital cryptocurrency has not yet arrived. However, retail investors without faith are often prone to liquidation and losses.

The defection of the “cargo carriers”

Musk has received attention in the process. He has always been a staunch "seller" of Bitcoin and Dogecoin, and his "believers" have always followed him.

But Musk, who is always moody, said on May 13 that he would stop accepting Bitcoin for car purchases, citing the fact that Bitcoin consumes too much energy and is not environmentally friendly. This was a fatal blow to Bitcoin, which once plunged by $10,000. In the afternoon of May 17, Musk replied to someone on social media that Tesla did not sell Bitcoin. Subsequently, the price of Bitcoin rebounded rapidly, soaring by $2,000 in one hour. A day earlier, Musk hinted on Twitter that Tesla may have sold all the Bitcoin it held. This caused Bitcoin, which had been falling for several days, to suffer another heavy blow because of this comment, and it plunged by nearly 10%. Musk's wave of operations really made people shout that they couldn't understand it. He "blew up" Bitcoin for a while, and then disliked its high energy consumption. What exactly is Musk thinking? What is the cost of his holdings?

Musk, who was shorted by Wall Street capital tycoons in his early years, was on the verge of collapse, but in the past two years he has taken control of alternative finance in the cryptocurrency circle. He tasted the sweetness of financing on Bitcoin. Tesla's financial report shows that as of March 31, 2020, the fair market value of the company's Bitcoin holdings was US$2.48 billion, which means that if the company cashes in the digital currency, it is expected to make a profit of about US$1 billion. On March 31, the price of Bitcoin was US$59,000, and US$1 billion of the US$2.48 billion market value was profitable, indicating that Tesla's average cost of Bitcoin holdings was less than US$25,000 per unit.

In the first quarter of this year, Tesla created the highest quarterly profit in history - $4.4 billion. Among them, the sale of Bitcoin brought in $100 million in profits, while the sale of cars lost more than $100 million, and the remaining profits came from the sale of carbon credits. Some people believe that since it has been sold, Musk does not need to be bullish on Bitcoin anymore. Subsequently, Bitcoin continued to fall until last week when Tesla announced that it would suspend the acceptance of Bitcoin as a means of payment for car purchases. Bitcoin suffered a Waterloo, once falling from a high of more than $10,000, and the entire cryptocurrency market evaporated more than $300 billion in market value. Subsequently, Musk continued to question Bitcoin's high energy consumption.

In addition, the price of the coin is far from the cost price of the "big coin holder" Grayscale Fund. Currently, Grayscale holds 652,900 bitcoins, with an estimated cost of $8.931 billion. In other words, the average cost of Grayscale holding one bitcoin is only about $13,700.

Specifically, some Wall Street institutions that were unable to invest directly in crypto assets due to compliance requirements began to make arrangements through some cryptocurrency trusts last year. Grayscale Trust is undoubtedly the most well-known one. GBTC is the largest encrypted digital asset trust product under Grayscale. GBTC is similar to an ETF fund, but there is no redemption mechanism and there is a 6-month lock-up period in the secondary market. GBTC's primary market subscription is only for qualified investors. According to its third-quarter financial report last year, 80% of its customers are institutional investors (mainly hedge funds).