Explained: Crypto market crash May 2021

Share on facebook
Share on twitter
Share on whatsapp
Share on linkedin

Bitcoin is in rally mode, posting its largest daily gain in six weeks as shorts covered positions over the weekend. Sentiment has shifted from extreme bearishness after a sharp correction in May and two months of consolidation between $30,000 and $40,000.

The crypto market crash in May seemed to be causing extreme fear among investors. With Bitcoin dropping below $35,000, all crypto experts, analysts, and investors wanted to know what lies in the future and where the crypto market is headed.

Background

In May, the cryptocurrency market crashed for the first time in 2021, with Bitcoin price decline more than 40% from ATH of $65,000 recorded in April. Since then, the market was more or less on a downward trajectory, making people wonder, “Will the crypto market ever recover from this crash? Has the so-called bubble finally burst?” These kinds of one-sided arguments and negative sentiments about the whole crypto ecosystem will lead us nowhere.

Therefore, it is imperative that we deep dive into the current state of the crypto market to give you some concrete and logical answers to questions you might have about the present and future state of crypto. Below, we have covered a brief timeline or series of events leading to what some people now like to call “The Cryptocurrency Crash of 2021.”

What’s happening?

The crypto market runs on similar principles to the stock market, where the emotions and psychology of investors play an important role. As discussed in our previous guide, the Crypto Fear and Greed Index is one of the most significant investor mood indicators. Starting June, the index consistently shows there has been extreme fear among investors, and one of the biggest reasons is the negative opinions about the crypto market spreading like wildfire.

In May, JPMorgan released a report claiming that institutional investors are dumping bitcoin in favor of gold. We need to understand one thing: Such an intimidating report from a global leader in financial services is enough to create negative public perception and fear among investors. Bitcoin is indeed running out of positive news for the past several months, whether about volatility or energy consumption of BTC that poses significant environmental risks.

If that was not enough, the impact of the China crypto ban and Elon Musk tweets is equally responsible for the tide turning against the positive sentiments of the crypto market.

Elon Musk: Hero Or Villian?

In May, Elon Musk, founder of Tesla and SpaceX, announced that Tesla had suspended Bitcoin as a payment method for their electric cars for environmental concerns. That was essentially the starting point of crypto decline. In May, BTC declined more than 5% after Musk made another tweet mentioning digital gold.

A single entity or an individual should not have such an enormous power to control the market sentiments since it goes against the principles of decentralization. Such an influence on the market is not healthy for the crypto ecosystem in the long run and should not be encouraged. Recently, an online activist group ‘Anonymous’ released a video criticizing Musk for using his social media influence to ‘unfairly manipulating the crypto market’ and ‘destroying the lives of ordinary people.’

China Anti-Crypto Pressure Tactics

Another considerable factor causing a drastic shift in momentum is China’s pressure tactics. China has already prohibited financial institutions from providing services to cryptocurrency companies. Thanks to fresh restrictions, many Bitcoin mining facilities in the country have come to a standstill.

It should be noted that China has been one of the superpowers for Bitcoin mining for years. After the China crypto crackdown, more than 50% of bitcoin’s hashrate has dropped off the network. Therefore, these sudden restrictions on the mining processes are bound to have some temporary effects on the market sentiments. However, it seems like a blessing in disguise where miners being forced to relocate to other countries could address concerns of China being a dominating force as far as mining is concerned.

USA Tax Day

Tax Day in the USA contributed to a price decline on both crypto and the stock market. If you are not familiar with the concept of Tax Day, it is the deadline for individuals to pay taxes to get the tax return for that year.

Similar to the last year, the Tax Day in the USA was delayed again by almost a month amid the Covid-19 pandemic and restrictions associated with it. Declines in the crypto market can be related to the delayed Tax Day deadline since the increased sell-off in the crypto market must have resulted from investors cashing out of crypto to pay off capital gains tax liabilities. According to the US Treasury Department, the Joe Biden administration has also proposed to enforce tax compliance that makes it mandatory to share information about crypto transactions exceeding $10,000 with the Internal Revenue Service
Regulatory Crackdown On Major Exchanges

Nowadays, the regulatory focus is increasingly turning to the trading platform operating in the cryptocurrency space due to many exchanges facing ‘false reporting’ and ‘wash trading’ charges while others are being investigated for their questionable trading practices. Although the recent regulatory crackdown on some major exchanges and trading platforms may not directly affect the market sentiments, these kinds of actions are enough to make investors uncomfortable and worried about investing in crypto in general.

Liquid was the first crypto exchange to get regulations in Japan by JFSA. We are fully regulated, licensed, and we meet the strictest safety standards by the Japan Financial Services Agency.

Closing Thoughts

There is no denying that the crypto market is volatile, with the price of assets witnessing a dramatic shift due to either fear or greed among investors. It is only natural that a price correction will always follow the rise in the value of assets, and more anxiety among investors equals more liquidity in the market. It essentially increases your chances of buying more assets at a comparatively low price. It is also essential to understand that world news and events affect both stock and crypto markets alike.