Bitcoin posted its lowest price since October 13 on Friday morning, briefly dropping to just over $55,000. As of this writing, the cryptocurrency has rallied back to $57,856, with resistance expected at the $58,400 benchmark. Ether also hit a three-week low Friday morning, dropping to $4,014. Like Bitcoin, Ether also recovered to $4,231 by press time.
Experts believe that the pressure on crypto prices isn’t due to long-term stakeholders selling out, though.
Instead, data suggests that derivatives are driving the price drop. Individual traders taking short positions on futures contracts have shaken investor faith in the coin’s price. “The market sentiment was sell, according to the taker buy-sell ratio,” CryptoQuant blockchain analytics CEO Ki-Young Ju told reporters Friday. “More people were shorting bitcoin via market orders.”
Just a week ago, Bitcoin was trading near its all-time high: $69,000 per coin. This week, a series of disappointing announcements combined to push the standard off of this peak. What’s making Bitcoin’s price drop, and how might it recover its earlier highs?
Fear, Uncertainty, and Doubt
Crypto enthusiasts refer to any negative press about the technology as FUD: fear, uncertainty, and doubt. There has been plenty of FUD in the news for crypto recently. Former secretary of state Hillary Clinton recently spoke at the Bloomberg New Economy Forum, calling crypto a destabilizing force.
“One more area that I hope nation-states start paying greater attention to is the rise of cryptocurrency because what looks like a very interesting and somewhat exotic effort to literally mine new coins in order to trade with them has the potential for undermining currencies, for undermining the role of the dollar as the reserve currency, for destabilizing nations, perhaps starting with small ones but going much larger,” Clinton said at the event Friday morning.
The former secretary of state’s comments came only days after the crypto industry shrank in response to new tax reporting laws included in the recently passed infrastructure bill. That bill, passed on Monday, will change how brokers are legally required to report digital exchanges worth $10,000 or more. Brokers that receive crypto payments exceeding that value will be obligated to share the sender’s identity with the IRS, opening crypto up to capital gains taxes.
Some analysts think the price drop could be a result of looming selling pressure from two legal cases. The first case is against Mt. Gox, a crypto exchange site that collapsed in 2014. Bitcoin stakeholders worry that the Mt. Gox case will flood the market with Bitcoin when the site’s creditors sell out of their payments.
“Those affected will receive a large sum of bitcoin, likely happening in Q1 or Q2 of 2022. This has brought some fear into the market on a longer term horizon,” Matthew Dibb, the COO of Stack Funds, told Reuters Thursday.
Analyst Noelle Acheson spoke with Yahoo Finance about the Mt. Gox case on Friday. Acheson believes the settlement is unlikely to have an immediate impact on the crypto market. “The timing is still unclear and could be in 2022 or even 2023. Also, many of the claim holders are hedge funds that may or may not choose to sell,” she insisted.
Another court case could also drop more crypto into the market. Ira Kleiman has sued Craig Wright over ownership of Satoshi Nakamoto’s 1.1 million Bitcoin wallet. Wright claims that he is Nakamoto, the pseudonym used by the anonymous creator of Bitcoin. Kleiman contends that Wright didn’t act alone when he created the cryptocurrency and that his brother David helped Wright create the blockchain technology.
The civil case might have 1.1 million Bitcoins tied up. However, Wright hasn’t offered any evidence that he possesses the wallet. He might not even be Satoshi Nakamoto: crypto experts doubt Wright’s claims that he created Bitcoin. As such, he might not even have access to the currency at the heart of the civil trial.
Long-term Bitcoin stakeholders haven’t budged in the face of this week’s profit-taking. Glassnode, a blockchain tracking blog, reports that only 26,461 coins held by long holders have sold this week. This pattern doesn’t indicate a panicked sell-off but instead an apprehensive attitude by individual investors.
This apprehension is present all over the stock market right now. Shareholders may fear that inflationary pressure could be stickier than the Federal Reserve initially thought. Inflation is usually bullish for cryptocurrency, but severe inflation could trigger higher interest rates. Investors typically sell out of high-risk assets like crypto when interest rates constrict monetary supply.
“Bitcoin’s long-term outlook remains bullish,” OANDA analyst Edward Moya told Reuters.
“But the waters over the next few months will be rough as institutional investors look to see if the Fed will be forced to raise rates sooner and trigger a broad-based sell-off of risky assets that include bitcoin.”
If Bitcoin’s rally continues, analysts expect to see it hit resistance at $60,000. Should the coin break past $60,000 again, a bull run could be inevitable.