Bitcoin Crash: Analyzing the May 19th Mayhem

DISCLAIMER: This is not financial advice; the article is for educational purposes only. These observations, takeaways, and predictions are based on my direct experiences with Blockchain and Cryptocurrencies for 10 years and have seen it evolve, crash, morph and grow. I am not a qualified financial advisor, please consult a professional for investment advice. I am also not advocating investing decisions based on any specific analysis mentioned in this article.

There is a lot of panic in the market nowadays with Bitcoin bulls and bears tearing all sentiments to extremes. Having seen all these cycles closely and been through all the FUD, FOMO, and HODL games, some observations on the crash event occurred on May 19th, 2021.

I have a ton of direct messages from seasoned investors who wanted to exchange ideas, newbies who have seen only one slice of time in the crypto journey, people who think governments can fight this, bitcoin maximalists trying to spread disbelief, and ardent conspiracy theorists. As I have mentioned often before, please look at data and fact first – it is hard to argue with bitcoin maximalists given their trained mind to dismiss data or newbies who will process every bit of FUD and think that moves the markets. Now, narratives have some impact but not as much as people think.

I have gone through much FUDs news ranging from the Mt. Gox incident, Warren Buffet's opinions, Jamie Dimon coming after this space, the China ban (the actual one in 2017), a few others, and then Elon. I can confidently tell you that none of these have had or will affect the market as newbies think. I have looked at a lot of data, facts and have pulled together some analysis on merit that others have conducted. These are also bytes produced by some of the most credible analysts in the market today.

On May 19th, 2021 it was yet another day for the record books and I read that this was the second worse day ever for Ethereum and Bitcoin had not seen these lows since February of 2021. I have observed the same phenomenon in 2012, 2013, 2014, 2016, 2017, and 2020 so this is nothing new, but for a newbie who has not followed this market or been in this for more than a couple of years it is shocking and like watching the freefall and meltdown of this entire industry.

Last week looked like many people trying to bail out of this market, many tried to get in, others tried to explain which specific FUD news caused this, the maximalist disbelief, and people trying to explain what is next for this space. However, given we are now nearing a week from the incident (a lifetime in crypto worlds), there is a lot of data and analysis available. If you want my dispassionate view, read on and if you are a bitter newbie, a naysayer stuck in the dinosaur era or a bitcoin maximalist then move on. This article will not make any sense to you.

The ultimate issue was not the FUD news like many believe Elon caused it or he averted a meltdown. It was an overall market narrative fatigue, massive liquidations, and nervous newbies. This whole space is changing so rapidly, but the one thing remarkably consistent is the behavior of Bitcoin maximalists and the nervousness of the newbies who are compelled to digest every piece of narrative created and chase every shitcoin ever invented.

Market Structure

My piece of advice to all newcomers into this space is there are deep-rooted fundamentals and technicals in this space, there is underlying machinery in this market, and it is often not easy to look at it from the lenses of the old economy. Bitcoin is an asset created for the future, in the new economy which we are in transition to - by its very definition and nature the new economy is fast-paced, disruptive, changing massively, and way more volatile than the old world. Measuring a new economic asset with the old economy lenses will not get people far, yes there are similarities but there are big fundamental differences too.

Let us look at some objective analysis:

• Sam Trabucco from Alameda Research states that the narrative behind the winter upswing was institutions getting into Bitcoin and in the spring, it changed to them looking at Ethereum. After a certain point, he mentioned that which coins are rallying did not matter, and understanding reasons for the buyers doesn’t either and it was much deeper.
• There was a ton of speculation behind the rallies i.e., the belief that ETH rallies were low leverage in spot exchanges and therefore very organic somehow unimportant. The implication was that if a downturn occurs there would be relatively few liquidations. This was both misguided and wrong because this has never been the case in the past 2-3 years and this is ascertained by volumes in both derivative and spot exchanges, where leverage is allowed unlike in 2017. The upswing will be rapid and so will unwinding.
• Sam also mentions that it was traders who leveraged long positions, not only institutions' spot buying which swung up the markets. The leverage levels spiked up to unsustainable points and were waiting for a day like May 19th, 2021 to blow up.
• Alex Kruger’s research also shows leveraged crypto was above historically sustainable levels since December 2020. Directional traders would not have made much from the time BTC was $20,000 and ETH was $600 given the massive leverage levels.

I've been monitoring the funding rates to check on leverage and it has been super high for a long time the party went on and on and on, searching for a trigger to unwind and finally found it with Elon and China FUD -Coingecko’s Bobby Ong

Willy Woo, one of my favorite crypto analysts and who is very data-driven mentioned that on May 18th, 2021- exchange flows showed a tidal wave of coins flowing in. Whales were dumping to take profit before Tax Day, but the same volume was not being absorbed by sharks, dolphins, etc. at a steady rate; with the inventory increasing on exchanges creating pressure on the price. Elon’s tweet came at that magnificent time to hit the prices. The new buyers panicked, prone to the FUD caused immediate selling.

Data shows 1.1 million wallets with age under 6 months dumped and fled crypto in panic selling. The fact shows anyone who has held the asset for over four years has never lost money.

In summary, the real picture is that we got a leverage-driven bull run with fading momentum, a heavy dose of FUD, a bunch of newbie investors who were more receptive to the FUD, and finally, coins moved onto exchange setting us up for the event.

Newbies still believe Elon created the upswing, the ones with more limited analytical skills believe he caused the crash and the ones with the least analytical mind believe he averted a total disaster.

If you do an objective analysis, why would anyone sell BTC, pay tax, and buy a depreciating asset like Tesla violating finance 101? Second, see the graphic below, more activity occurs on the Blockchain in one hour than people would Teslas in a year or two.

Analyze this more carefully now; on his left hand, Elon picked an appreciating asset to drive the digital transformation of the balance sheet and I think he picked the absolute right asset. On the right hand, he picked Bitcoin to operate as a cryptocurrency to buy cars and I believe he picked the absolute wrong asset - because for what Bitcoin has morphed into, it won't be a currency but a store of value and a reserve token.

If you look at some more data supplied by researcher Ryan Alice who writes for Coinstack, it clearly states that everything was generally okay fine after the Elon tweet and some recycled China FUD, BTC was trading at $42,000 and ETH at $4,000 after a rough weekend from those two narratives. But a few things followed i.e.,

• At 12:40 AM UTC, whales moved 500,595 Ethereum ($1.65 B) and 13,555 Bitcoins ($535 m) onto exchanges with the intention to sell. This dropped ETH price from $3392 to $3009 and BTC to $37,976.
• Within four hours, European and US investors woke up to price declines and in the grip of fear at BTC being at $38,000 and ETH nearing $2,500 kicking off the cascading liquidation chain forcing auto sells at market prices and compressing value for BTC to about $30,000 and ETH to $1.8K within 60 minutes.

Analysts like Sam again reinforced and mentioned this was just waiting for a day like today to unwind. It did so when there was a big unidirectional move with lots of aggressive positions getting opened, small reversion liquidations then create momentum for big reversion liquidations, triggers can be tweets like Elon or China or another vague regulatory FUD. I think it is more a natural correction that happens from time to time in every cycle, trigger be anything.

A staggering number of 775,000 traders had their accounts liquidated (~$10 billion in value). It is even crazier is that on its way down, people kept opening leveraged longs trying to catch the bounce back and getting those liquidated. Hence any attempt to countermove ended in adding more blood to the scene.

Infrastructure Woes

The market infrastructure revealed the good, the bad, and the ugly of very nascent crypto space. The good news is that all the DeFi held well and despite all the newness did not fall apart like a pack of cards. They were bent but held strong e.g., Uniswap, AAVE, Compound, etc.

One of the big reasons the selloff was so bad was the none of the hardcore investors could access the trading accounts, a systemic infrastructure failure of mainstream exchanges like Coinbase and Binance caused a lack of bargain to pick up at that very timeframe. Decentralized exchanges held up, but fees were off the charts and many held back. This had specific consequences there was a multi-hour period where people absolutely gobbling the dip simply couldn’t however there has been recovery.

Let us explore a few more dimensions of this, leverage has wrecked this market and caused newbie panic across many cycles.

• Besides whatever BTC maximalists think that stopping leverage is against free markets, but this market will not mature until 100x leverage is being offered freely. The newbie without understanding the underlying crypto market machinery and lack of experience with trading is not just geared up for it.
• Experienced folks can use leverage for asymmetry, I believe most folks should not use it. But each one to their own.

Elon and China FUD may have been a catalyst, but we must understand how the geared and wired machinery works.

Narrative and FUD

Now, many of you have seen and heard me outrightly dismiss FUD created without data and fact behind it. I do believe FUD narratives play a role in the market shakeout and also market maturity, it is important to understand narratives but to do so we must understand what type of power they have and don't have.

When the news about US inflation, hit the mainstream media. Bitcoin did not move and on the contrary, it went down. Some naysayers and anti-Bitcoiners were rejoicing on Twitter trashing this narrative. Many of you messaged me, saying you don’t think the inflation narrative was accurate. My answer very consistent as always, it was not about Bitcoin abruptly fluctuating in a day. But this narrative does work, that is how it found its way into Tesla, MicroStrategy, and several institutional investor balance sheets and one must take a 12–24-month view on this, not 24-hour views. The fact (outside of narratives) is that ridiculous printing of the US dollar in the last 12 months creates a rapidly depreciating asset, the velocity of USD depreciation is at an all-time high whereas the volatility of Bitcoin is at its all-time low when compared to prior cycles. People are trading off the volatility with the rapid velocity of depreciation. You cannot measure this like-to-like with gold, as mentioned several times a new economic asset cannot be evaluated with a mindset from the pre-digital era. Something that newbies must come to terms with.

Narratives are usually not about knee-jerk reactions, but broad patterns and at times created to impact weaker hands or a specific set of stakeholders. Eventually, Bitcoin, over decades may take down central banks or move it from the centralized configuration we know it. But like it or not Central Banks still have control over fiat used to enter the crypto world today and whether you agree, or not regulatory and media FUD will continue to impact volatility for some time. Something Bitcoin maximalist must come to terms with.

Media recycled, the old China news and newbies fell for it because they have not seen the actual impact of the China ban back in 2017, which was way more devastating on the crypto markets than what Elon or someone else did. For now, "China bans crypto" will get more clicks than "China reiterates crypto ban".

Conspiracy Theories

The conspiracy theory around whale manipulation has been doing the rounds as long as I have been in this whole cryptocurrency world. The impact of Wales dumping used to be much more devastating than what it is today if a coordinated attack is launched it can somewhat move the market. But ardent Bitcoin maximalists and conspiracy theorists have been working overtime to prove out that a Wyckoff distribution model is being used to manipulate the markets, this attack is planned with media concentrating a lot of a feud into one week to drive prices down to $25,000, therefore, liquidating some specific individual, etc. These things are also having a profound impact on the newbie psyche on market manipulation especially after they have been liquidated. I'm not a believer in these theories will not propagate it but in the spirit of bringing it to you guys mentioning it here, those who are interested can do their own research on this topic.

Concluding Thoughts

• Look at data, facts, bull cycle signatures and understand the underlying fundamentals. Your opinions from an old economy lens, across a narrow slice of time without proper analysis mean nothing.
• FUD and media news play a role, but they are all short-lived. They cause triggers in the market up and downswings, but the effects always taper off.
• There has been no change in the behavior of crypto newbies or maximalists across bull cycles. Each cycle also brings in a set of newer and more “get rich quick” newbies, crypto markets do not work in a way that they want.
• Institutions have stronger hands and holding power than they have been given credit for.
• Understand the market structure, players, the machinery more, and narratives less. The former moves crypto markets, the latter has a temporary impact.
• Retail investors are not all na?ve, they have played a very important role in the evolution of this space and will continue to do so. They have been in this before institutions came in and will continue to be invested.
• Do not fall into narratives of speculative altcoins, they are less likely to be adopted by institutions like Bitcoin. It is almost a 100% retail-driven zone.
• The infrastructure, ecosystem weaved around us through exchanges, protocols and data is an important factor. Its fragility did add to the mayhem, not an area one should ignore.
• There are fundamentals in this market, the halving means that you cut the supply into half on the demand at that point in time. Analyze for yourselves what this means.

The record influx of stablecoins on exchanges, the S2F models, and prior bull run data all indicate the secular tailwinds being intact and you might be the most misguided soul if you believe that you need another Elon tweet or the likes being tailwinds and not market structure fundamentals. Bitcoin came from $0 to $30K despite an Elon or China, this is not going away. There will be continued volatility, there will be ups and downs within each cycle and outside of it, but the asset class and its growth are the reality of the new economy.

Crypto and Bitcoin are not easy, prepare for a multi-year wild ride if you want to stay in it!

I hope this show has been useful to you and help you think about things a little bit differently. Data and facts run the show, not opinions and one cannot measure the new world with an old economy mind.