We recently observed extreme volatility in bitcoin prices that traded between approx. $30,000 to $40,000 on the 20th of May, down about $25,000 from the ATH (all time high) $65,000 mid April.
Source: Coindesk, 20/05/21
Upheaval came after Tesla said it would no longer accept payment in cryptos for its electric cars due to environmental concerns, just three months after announcing plans to accept the cryptocurrency as payment. His major source of concern seems to be the amount of fossil fuels used to mine bitcoin and for the transactions.
Elon Musk’s major U-turn raises two questions: how far individuals are doing social market manipulation and how green can cryptocurrencies be?
How far can individuals influence the market?
Popular personalities that helped push the blockchain technology and companies into mainstream can also push it the other way. Many high-profile investors are showing and expressing their interest into the crypto market, with for example, Jamie Dimon, CEO at JP Morgan Chase, now bullish when he was before a prominent bear. A number of billionaire hedge fund managers are also expressing their views, and some are convinced that cryptos are the digital equivalent to gold. Elon Musk has just recently changed his mind and advocates now for greener cryptos but, given the gains he has probably made from cryptos, we can doubt his reasons.
More and more people, individuals, young traders, institutional investors are showing a strong interest in cryptos, and some of them are expressing themselves on social media. Within a still small and nascent market (total crypto market cap at $2trillion as of early April compared to $49trillion for the US stock market), it is not a surprise such comments can trigger big swing prices.
Nevertheless, individuals sharing their views on social media are far from being the only reason behind increased price volatility. As per example, the announcement (19/05/21) by the Chinese authorities to ban financial institutions from offering their customers any cryptocurrency-related services has pulled down the bitcoin price. Crypto exchange Binance, which was placed under investigation by the US authorities for possibly facilitating illegal transactions, had also shaken the market.
In a more structural way, other participants have also the potential to influence how markets move such as large bitcoin holders, also called whales. Their significant funds allow them to change the market trend by placing large buy or sell orders. As the crypto space faces more regulations, the whales might eventually lose their power to manipulate the market. Young people's behaviour as well cannot be ignored: millennial and Gen Z seem to be more likely to invest in crypto than equities. Retail traders are also eager to get into this space and some have a potential to disrupt the market with speculative views.
How green can cryptocurrencies be?
The bitcoin protocol, known as proof of work, is a high energy consumer. An alternative to this protocol is the proof of stake consensus which we detailed in one of our previous memos: “Proof of Stake consensus winning the battle of scalability and sustainability”
The recent turmoil in the crypto space has led to a sharp correction in the bitcoin dominance which has tumbled down from 70% to 40% since the beginning of the year.
Bitcoin Dominance (Jan-May 21)
Source: Coin Market Cap, 20/05/21
Ether, the second-biggest cryptocurrency, has benefitted from the shift, most probably because it is moving to a PoS protocol with the Ethereum entire blockchain upgrading to ETH 2.0 to improve the whole network scalability but this process is complex and will take time.
In the meantime, appealing eco-friendly digital currencies have emerged and resisted the crisis.
Tezos (XTZ) uses a PoS model which consumes less energy and allows validators to create a node with a secure deposit of Tezos funds in order to come to a consensus on the network for each block validation. This model is less energy intensive and provides users with a way to earn more Tezos over time. It has also the backing of Tim Draper, a top Silicon Valley venture capitalist.
Cardano (ADA) is more scalable than Ethereum and faster than Bitcoin. Interestingly enough, Cardano takes some of the features of both but also layers on some new innovations. Cardano has been backed by an impressive group of researchers and academics and is one of the most dynamic platforms for cryptocurrencies
Crypto market is still a niche that is currently experiencing a high level of instability today due to intense scrutiny from high-profile investors (who comment on social media), retail investors and young investors entering this market for speculative reasons, constant change and adaptation of the regulation but it is worth noting that the presence of trading firms and institutional investors is also bringing stability.
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