Behind the Bitcoin Flash Crash: What is the Biggest Risk in the Bull Market?

Editor's note: This article comes from DC News (ID: shenliancaijing).

Bitcoin is still continuing its decline from yesterday.

Since yesterday's brief pullback after a $10,000 plunge, Bitcoin has begun to falter again. Currently, Bitcoin has fallen by 6% to the $50,000 mark.

At the same time, "Bitcoin plummets" ranked fourth on Sina Weibo's hot search list.

This ranking is even higher than the previous "Bitcoin breaks through $50,000".

This round of decline came suddenly and caught people off guard.

After the big drop, we can't help but wonder, what caused this big drop? After this, where will Bitcoin and the entire cryptocurrency go? And what is the biggest risk of the bull market behind the Bitcoin flash crash?

A sudden crash

Since yesterday, Bitcoin has plummeted from its highest price of $58,326 to its lowest price of $47,650, a single-day drop of more than $10,000 and a maximum drop of more than 20%.
<img alt="Behind the Bitcoin flash crash: What is the biggest risk of the bull market?" src="https://pic.36krcnd.com/202102/23072336/kh67%3Cspan%20class=!heading" alert"\="" style="margin: 30px auto; padding: 0px; border: 0px; font: inherit; vertical-align: baseline; display: block; max-width: 840px; border-radius: 4px;"> 0x a7lzrv990i" data-img-size-val="1084,565"/>According to statistics, on the day when Bitcoin plummeted, a total of 330,000 people on the entire network became victims of liquidation, and the largest single coin liquidation order was worth as much as 20.65 million US dollars.

In fact, not only Bitcoin plummeted, but global financial stocks all experienced varying degrees of correction last night.

A-shares and Hong Kong stocks both closed lower. European indices opened lower across the board and fell further. Their major indices all fell by more than 1%. The declines in the three major U.S. stock index futures also widened significantly, with the S&P 500 futures falling nearly 1% and the Nasdaq futures falling more than 1%.

It is worth noting that as the global financial sector declined, blockchain concept stocks and technology stocks fell particularly significantly.

Among them, Canaan Inc. closed down 15.89%, cryptocurrency mining company Riot Blockchain's stock price fell 11.06%, and Marathon Patent fell 10.21%.

Tesla, which recently announced a $1.5 billion investment in Bitcoin, also fell 3.7% yesterday.

At the same time, blockchain concept stocks listed in Hong Kong stocks were also not spared. Huobi Technology fell nearly 15%, OKEx fell nearly 14%, and Xiong'an Technology fell more than 7%.

The global financial market, whether it is the stock market or the cryptocurrency market, has experienced a major drop.

Two potential risks in the current bull market

There are many different opinions about the reasons for the sharp drop in Bitcoin.

The remarks of the new US Treasury Secretary Janet Yellen are considered a signal: Bitcoin is often used for illegal financing, its application is inefficient, Bitcoin is highly speculative, and investors should be careful. Digital currency may lead to faster and lower-cost payments, but many issues need to be studied, including consumer protection and money laundering.

In fact, this is not the first time that Yellen has expressed concerns about Bitcoin. In January of this year, when she attended a US Senate hearing, she reiterated her belief that the use of Bitcoin was an illegal transaction. At that time, the price of Bitcoin also experienced a brief correction.

In addition, Yellen hinted that the Biden administration supports studying the feasibility of a digital dollar, contrary to the lack of interest during the administration of former Treasury Secretary Steven Mnuchin; this also indirectly reduced the attractiveness of Bitcoin.

Yellen said at a virtual conference hosted by The New York Times on Monday that it makes sense for central banks to study issuing sovereign digital currencies. A digital dollar could help address barriers to financial inclusion for low-income households in the United States.

Behind Yellen's remarks lies the problem that Bitcoin has always faced - regulation. Especially after its market value exceeded one trillion and was recognized and accepted by more and more large companies and institutions, the direction of regulation is one of the huge risks.

On February 14 this year, U.S. SEC official Hester Peirce said that since major companies such as Tesla, Bank of New York Mellon and Mastercard all support cryptocurrency as an alternative asset class, there is an urgent need for a clear cryptocurrency regulatory system.

In addition, just before the Bitcoin crash, South Korea's financial regulator introduced new regulatory measures for cryptocurrency exchanges , requiring exchanges to mark and inform their platforms of any seemingly abnormal transactions within three working days.

In addition, the Securities and Exchange Board of India also stated on February 22 that holding cryptocurrencies is a "red flag" and that Indian companies should completely abandon their cryptocurrencies before applying for listing.

Coincidentally, on the same day, British financial economics company IG Group announced that it would stop providing crypto derivatives services to retail users due to the ban of the UK Financial Conduct Authority.

Earlier, due to Musk's "calling orders" in Bitcoin, many industry insiders, including "Dr. Doom" Nouriel Roubini, have stated that Musk's tweets about Bitcoin before Tesla invested in Bitcoin were a form of market manipulation and the U.S. Securities and Exchange Commission (SEC) should investigate this.

Trader Peter Brandt was even more "alarmist" today, warning cryptocurrency investors to look back at the history of gold, and that in theory, Bitcoin could be banned. Historically, in 1933, US President Roosevelt signed a bill to confiscate gold bars and declared the possession of gold bars illegal.

In addition, another risk to the development of Bitcoin market is the fiscal and monetary policy of the Federal Reserve.

After the outbreak of the new coronavirus epidemic, the global massive money printing provided sufficient financial support for the global financial market and the bull market of Bitcoin, such as the United States.

After entering March 2020, the Federal Reserve launched an unlimited QE policy, and the United States launched a massive economic stimulus plan, resulting in increased market liquidity and a continued depreciation of the US dollar, thereby driving the U.S. stock market and the cryptocurrency market that is highly correlated with the U.S. stock market to continue to rise.

Former U.S. Treasury Secretary Summers previously said that U.S. President Biden's $1.9 trillion bailout plan is likely to inject too much cash into the real economy, induce the economy to exceed its capacity limit and trigger inflation. Driven by the overheating of the economy and rising prices, the Federal Reserve is likely to be forced to raise interest rates earlier than market expectations. He believes that it is likely to take action to raise interest rates before the end of 2022.

Meanwhile, U.S. money markets are betting on a 70% chance of a 25 basis point rate hike by the end of 2022, up from about 50% last week. Praveen Korapaty, a strategist at Goldman Sachs Group Inc., said the Fed wants to end its asset purchase program before starting to raise rates, meaning the earliest feasible rate hike would be around the end of 2022.

Yellen also said in an interview with reporters that the current federal debt interest expenditure accounts for about 2% of GDP, which is similar to the figure before the Federal Reserve began to raise interest rates sharply in 2007.

Once the Fed raises interest rates, it means that the liquidity of market funds will decrease, the US dollar will strengthen, the phenomenon of funds flowing out of the stock market will be more obvious, and the stock market will fall.

As the time for the shoe to drop becomes more certain, the entire financial market has also responded accordingly, as evidenced by yesterday's plunge in global stocks.

However, it is worth noting that since the 312 black swan incident and with the strong entry of international giants such as Grayscale , MicroStrategy, and Tesla, the relationship between Bitcoin and the entire cryptocurrency market and the traditional financial market has long been "intimate."

As financial markets fell, Bitcoin was not immune.

Finally, the rising price of Bitcoin also faces the potential test of declining market liquidity.

Bitcoin has roughly tripled in the past three months, but liquidity in the bitcoin market has deteriorated, according to JPMorgan strategist Nikolaos Panigirtzoglou.

Previously, Nikolaos said in a report on February 19 that currently, the liquidity of the Bitcoin market is much lower than that of gold or the S&P 500 index, which means that even a small flow of funds can have a significant impact on the price. New investors in Bitcoin should be prepared for large fluctuations, and prices may plummet, just like the previous surge."

However, despite the risks and the plunge in Bitcoin, there is no need to be overly pessimistic.

Zhai Zhenlin of Shuimu Weiming Fund once said that from a technical analysis point of view, Bitcoin is currently at the end of the third wave of the five waves of the bull market. It is possible to peak and fall in the short term, and it is expected to continue to rise in the second half of the year after adjustments. The market is currently in a speculative stage, and there is no sign of a bull market peak.

As Gemini co-founder Tyler Winklevoss said, Bitcoin has always been two steps forward, one step back, and then two steps forward again. Few people understand this.

Last year's global money printing, coupled with the launch of compliant investment channels by Grayscale and Paypal, and the demonstration effect of technology giants such as Tesla and Twitter, not only brought sufficient funds to the cryptocurrency market, but also enabled Bitcoin and the entire cryptocurrency concept to be promoted to a greater extent around the world.

As a result, the market has also been brought to the level of Bitcoin exceeding $50,000 and a huge cryptocurrency market with a maximum value of $1.76 trillion, surpassing Amazon and ranking third in the world.

Things are different now. No matter what, although Bitcoin and the entire cryptocurrency market are still facing criticism, the entry of many institutions and the huge market value are showing the world the legitimacy of their existence.

As we are in the midst of it, what we need to pay attention to is the impact of global economic trends and regulatory policy changes on the Bitcoin and cryptocurrency markets.

References:

1. "Two big guys joined forces to strangle Bitcoin's sharp drop. Why do institutions say that the future market will be better than gold?" Source: Sina Finance.

2. "Bitcoin plummeted 20% late at night, and 360,000 people were liquidated within 24 hours", source: Jiemian News.