The market’s decline appears to be continuing despite growing demand and confidence from retail and institutional investors in the cryptocurrency markets. A blog post from Robinhood, a trading platform widely used by Generation Z and Millennials, titled Crypto Goes Mainstream mentions that more than 6 million new crypto users joined the platform in the first two months of 2021 alone. With monthly subscriptions in 2021 being 15 times higher than the 2020 average, this clearly indicates a shift in the way retail investors view cryptocurrencies.
The market’s decline led to the fall of bitcoin (BTC) on the 28th. February reached a low of $43,700, down 25% from the high of $58,352 on the 21st. February. With only seven days between these milestones, price volatility seems extremely high, especially for all those new crypto investors who rode the wave during the bull run of early 2021 and late 2020.
Experienced investors often know that such price corrections occur in financial markets, including the stock market – and they are cautious. A good example of this is the recent decline in Tesla shares, which underwent a sharp correction of 11.4%.
Price dropped despite increased demand
This price correction is often natural for financial assets that have long up periods and value increases of several months, as we see with bitcoin. Institutional investors, who often believe strongly in their long positions because they believe their investments can add value in the future, wait for such price corrections to pick up more bitcoins. However, due to the bureaucratic nature of large organizations, they often have to overcome several hurdles before they can finally invest.
Jay Hao, CEO of cryptocurrency exchange OKEx, told Cointelegraph that given the early stage of the bull-run, a pullback in prices is to be expected. Most government agencies will have to justify their bitcoin purchases not only to board members, but also to investors, so there will be a fair amount of due diligence and justification for investment actions in their portfolios.
Because adopting cryptocurrencies can be a lengthy process with many obstacles, Hao thinks some institutions may become discouraged: Many still think that with a market capitalization of less than $1 trillion it is not yet big enough to invest in, while others are put off by the volatility.
This theory is supported by institutional investments that come from companies led by powerful business leaders like Jack Dorsey and Michael Saylor. Square was the first major institution to buy a perch, and the 23rd. February added 3,318 bitcoins worth about $170 million to his holdings. Given that more than 80% of Square’s revenue in the third quarter of 2020 came from bitcoin, this decision seems like a no-brainer.
MicroStrategy CEO Saylor also announced at 24. In February, the company announced that it had acquired another 19,452 bitcoins, which were worth about $1 billion at the time. The following week, on 1. In March, he said the company bought another small amount of 328 bitcoins, which were worth $15 million at the time. According to Bitcoin Treasuries, MicroStrategy currently holds a total of 91,064 BTC worth nearly $4.6 billion. After all, it is 74% of the company’s market capitalization. Mr. Hao further suggested that this mission may not be as easy for other agencies:
Other institutional custody solutions are under development, including by BNY Mellon, but will be commercialized later this year. It takes time. For most institutions, the decision to buy a BTC like Michael Saylor is not an easy one. Most of them have to go through stressful processes first, and I think that’s part of the reason for the break.
Given that the most notable correction in the price of bitcoin occurred on the 12th. March 2020 – also known as Black Thursday – this recent price drop may reflect the cyclical nature of the asset. Shane Ai, who is head of crypto-currency derivatives research and development at Bybit, a crypto-currency derivatives exchange, told Cointelegraph: Historical price seasonality is not in bitcoin’s favor in March. Knowing this, traders would have been more cautious about delaying.
This seasonality of prices is also evident in the Crypto Fear and Greed Index. According to the index, a value of 0 means extreme fear and 100 extreme greed. Historically, the index has fallen to lower levels in March compared to pre-March levels this year.
Canadianbitcoin ETFs createmomentum
The first two bitcoin exchange-traded funds (ETFs) in North America were launched amid a declining market in Canada. Despite the declining market, these two ETFs were popular. The first ETF was launched on 18. Launched in February by Target Investing. In a short time, Purpose’s ETF has already amassed $836 million in assets under management, equivalent to 12,158 BTC.
Shortly after its initial launch, Evolve Fund Group’s bitcoin ETF was also launched in Canada after receiving the necessary approvals. The ETF currently has nearly $65 million worth of bitcoins in its fund. To compete with Purpose, Evolve even started a price war with Purpose by lowering the management fee of its bitcoin ETF from 1% to 0.75%. Currently, the Evolve ETF has less than 10% of the Target ETF’s assets under management.
An ETF is a basket of assets – in this case, bitcoin – that is traded on an exchange, just like stocks. ETFs are often a channel that institutions use to access certain assets because they offer greater liquidity and tighter spreads. Bitcoin ETFs are doing well despite the market drop – another sign that institutions see the recent decline as a healthy correction and an opportunity to buy some more bitcoin at a lower price.
New investors show weak hands
The introduction of cryptocurrencies in the first quarter of 2020 and the first two months of 2021 has lured many new investors to the cryptocurrency markets. However, some investors are attracted to this asset class because of the extremely high returns it offers compared to traditional investments such as stocks, commodities and bonds. But these investors are not used to the volatility of the cryptocurrency market.
Massive sales took place on the BTC market when the price reached $44,000, according to Coinbase data. Hao developed this phenomenon: Many new investors are afraid of volatility, and we often see this type of panic selling when a quick price correction occurs. He added others: We will continue to see weak hands pull out of the range as price runs wild and corrects upwards.
Alternatively, new investors could sell some of their bitcoins at a profit to invest in altcoins instead. Even in the bitcoin derivatives markets, sales have increased in the overall market, as evidenced by the daily volumes of bitcoin futures and associated open interest, or OI. Over the course of the fall, Bitcoin OI futures fell more than 20% from their peak just before the fall.
The futures market IO measures the flow of money into the market. The 20% drop in IO indicates that negative sentiment has seeped into the market due to falling prices. At the same time, it is important to note that the market reached record market capitalization much faster than the public expected. Therefore, in retrospect, one might expect a pullback with a healthy correction.
Whether the decline was caused by weak selling or simply a healthy correction as markets cooled from a peak in early February, it is clear that institutions have not been deterred by volatility. They seem to have welcomed the price drop, as it has allowed them to buy the drop and own more bitcoins bought at a lower price than what is currently considered the true price.
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