This week in crypto: Markets begin to climb following weekend crash

Published on May 24, 2021

The crypto world experienced another week of fear, uncertainty, and doubt as markets plummeted on Wednesday and again over the weekend, before seemingly starting to climb again today. Global search interest for “cryptocurrency” also reached all-time highs.

Of major tokens, Ethereum experienced the most severe swing of the week, with prices briefly dipping below $1,800 on Sunday before recovering to above $2,500 on Monday — still far below the $4,400 all-time high set less than two weeks ago. 

Compared to the broader market, Bitcoin held up relatively well — with prices on Monday down about 10 percent for the week. But what drove the sell-off? There appear to be three major sparks: fear of a Chinese government crackdown on crypto, uncertainty around US regulators’ intentions, and fallout from Elon Musk’s tweets from last week.

• On Friday, Chinese Vice Premier Liu He called for authorities to “crack down on Bitcoin mining and trading behavior.” Chinese officials reportedly have a variety of concerns about the cryptocurrency: its potential to disrupt other markets, the perception that Chinese mining operations are using too much energy, and a desire to protect the digital Yuan (the central-bank digital currency the nation has been racing to develop). 

• In the wake of the announcement, some large mining companies announced they’d be suspending operations in China. This is significant because a large portion of all mining happens in China. (Important to note that many in the crypto community see the potential for less mining to be concentrated in a single country to be a positive outcome.)

• To longtime Bitcoin watchers, the Chinese official’s statement and subsequent market impact brought back memories of 2017, when news and rumors of a Chinese crypto crackdown caused multiple major sell-offs.

• One thing to keep in mind is that crypto trading in China has been officially banned by the Chinese Communist Party since 2017 — so it’s not clear whether or not the Vice Premier’s statement represents a new position. 

• On Thursday of last week, the US Treasury announced that any crypto transfer of $10,000 or more will have to be reported to the IRS. According to a CNBC report, the move came as analysts on Wall Street and beyond suggest that the Treasury and SEC could “soon take a more active role in cryptocurrency regulation.”

• And as we reported last week, Elon Musk surprised the crypto community and sent markets reeling when he announced on May 12 that Tesla would suspend accepting BTC payments due to concerns over the environmental impact of Bitcoin mining. 

Musk meets with North American crypto miners

The Tesla CEO met with the biggest North American mining companies (including Argo Blockchain, Hive Blockchain, and Riot Blockchain) on May 23. Following the meeting, the mining firms announced the formation of the Bitcoin Mining Council — a consortium that aims to accelerate the adoption of sustainable-energy mining worldwide. 

So what does the science say about crypto and the environment? While everyone agrees that Bitcoin mining is a resource-intensive process, Bitcoin doesn’t seem to be a significant contributor to climate change — and new research shows that it could even be helping drive the transition to sustainable energy.

• According to the Cambridge Bitcoin Electricity Consumption Index, there is “little evidence” that mining directly contributes to climate change. 

• Miners are incentivized to find the cheapest energy sources available. That generally means excess power (electricity that would otherwise be wasted) and/or sustainable energy, which is plummeting in price. 

• By placing mining operations at the source of green energy, utilities can monetize their excess supply. In fact, at least one publicly-traded power company has explored participating directly in mining to capture value from excess supply that can be used to build out sustainable-energy operations.

• The private-sector Crypto Climate Accord — a consortium of major crypto companies — aims to power 100 percent of the industry with renewable energy by 2025. 

• As reported by New York magazine, Square recently released a white paper finding that “Bitcoin mining presents an opportunity to accelerate the global energy transition to renewables,” and “could encourage investment in solar systems.” (Interestingly, when CEO Jack Dorsey tweeted the research, Musk responded: “True.”)

• Ethereum is currently undergoing an upgrade to ETH2, which will shift the second-biggest cryptocurrency by market cap from a mining-based system to a more efficient “proof of stake” system. According to a report from the nonprofit Ethereum Foundation, “Ethereum will see a greater than ~99.95% reduction in energy use post-merge.”

• Learn more about crypto and the environment with our new fact-check. 

Who was buying and who was selling this week?

Whenever prices fall dramatically, we naturally tend to think about the people who are driving the decline by selling. But for every seller there was a buyer — and it can be useful to delve into just who was buying and who was selling as prices declined. 

• In one piece of interesting news, on-chain analysis from Glassnode suggests that institutional traders — hedge funds, corporations, whales — took advantage of falling prices to “buy the dip.”

• Data from Chainalysis suggests that individual “retail” traders were particularly impacted by falling prices. 

• As is often the case when a market sees dramatic swings, leveraged traders (investors making bets with borrowed funds) appear to have “turbocharged” the dip, according to a Bloomberg report. When prices drop precipitously, leveraged positions may be sold off automatically. As the article notes, “Bitcoin and Ethereum’s spectacular ride is arguably the third time in the space of two months when margin calls have roiled markets”

How did DeFi handle the dip?

Leading decentralized finance (or DeFi) protocols operated smoothly during the crash — a positive sign for the burgeoning industry. On May 19, developers for Compound Finance (a leading DeFi protocol for borrowing and lending) tweeted: “This morning, crypto prices declined more rapidly than at any point in the Compound protocol’s history. The protocol withstood the volatility flawlessly.” 

Other DeFi protocols such as Aave and MakerDAO also withstood the volatility. And while the total value of deposits has fallen in the past couple weeks, these protocols have still grown significantly over the past year.

In addition, major decentralized exchanges appeared to have held up well against huge trade volumes. Uniswap reached its highest daily trading volume with no downtime.

In other news: Investors shift to stablecoins, Ray Dalio owns “some bitcoin”

• Following the NBA and the MLB into the world of non-fungible tokens, Major League Soccer announced new NFT products. (Learn more about NFTs.)

• As global search interest for browser-based wallet Metamask continued toward all-time highs this week, mobile app Coinbase Wallet announced a new Chrome extension that will make it easier to interact with DeFi apps from your desktop or laptop computer, without having to entrust a browser’s security with your private keys. 

• As crypto prices fell, many traders sought refuge in stablecoins. The market capitalization of USD Coin surged past $20 billion — a 400 percent increase since the beginning of the year. (USDC is governed by Centre, a consortium in which Coinbase is a founding member.) 

• In other USDC news, a new fintech app powered by the stablecoin announced an all-star lineup of investors, including Sean “Diddy” Combs, Kevin Durant, Carmelo Anthony (alongside VC firms like Andreessen Horowitz and Coinbase Ventures). The app, which is called Eco, will offer an alternative to traditional bank accounts and payment systems like credit cards, and will use USDC on the back end to underpin all balances. Users will earn rewards for balances and spending.

• India, which had been considering a crypto ban, may be experiencing a change of heart. As reported by India’s Economic Times, “The central government may form a fresh panel of experts to study the possibility of regulating cryptocurrency in India.”

• Billionaire investor Ray Dalio — founder of Bridgewater Associates, the world’s largest hedge fund — revealed in an interview that he owns “some Bitcoin.” Citing concerns about inflation, he said, ““Personally, I’d rather have bitcoin than a bond.” 

• Wells Fargo is the latest large bank to offer crypto exposure to wealthy clients.

• MicroStrategy, which began adding bitcoin to its treasury last year, announced that it made another $10 million purchase this week. As of May 21, the total value of Bitcoin held by Microstrategy is more than $3 billion. (MicroStrategy CEO Michael Saylor also organized the meeting between Musk and the major North American mining companies.)

• The University of Pennsylvania announced an anonymous gift of $5 million in Bitcoin. Learn more about the potential benefits of donating crypto.

• Wondering which cryptocurrencies would have provided the biggest return on investment (or ROI) over the last week, month, and year? Then check out our weekly chart: