Bitcoins May 19 Correction Is Similar to 2017. Or Is It?

Bitcoin (BTC) and the rest of the crypto market tanked earlier this month, with BTC dropping 30% and ETH losing two months of gains seemingly overnight. This market downturn is not the most severe crash in terms of percentage but set records in absolute value lost.

The most prominent BTC correction in percentage loss was from Nov 30, 2013, to Jan 12, 2015, which concluded with a whopping 87% decline marked by a steep drop from a high of $1,163 down to $152.40.

BTC rebounded as May 19 went on, recovering some lost ground but still stomaching a substantial blow to its value.

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What were the catalysts for this crash?

BTC Does Not Operate In a Vacuum

As the dust settled following May 19, it was clear that a significant correction had occurred.

• Was this due to varying macro forces?
• Was it solely sentiment-driven?
• Was it traders realizing gains?
• Was it a natural correction intensified with leverage?

Or was it a combination of the lot?

BTC entered its most recent bull run in Q4 2020. It blew past the prior high of $20,000 and then rocketed into uncharted territory. Around this time, followers of the BTC treasury would have noticed significant filings from firms like MicroStrategy, MassMutual, and Tesla, stocking up on billions worth of BTC. These substantial investments served to legitimize BTC as a holding, catalyzing the ensuing Bull Run.

Elon Musk did more than just grow Tesla’s BTC holdings. He announced that Tesla would accept BTC payments for its products, further injecting increased optimism and excitement into the space. When Tesla announced they would no longer take BTC for car purchases, BTC’s inspired growth began to wane.

China further exacerbated this downward momentum with the reiteration of its stance on Bitcoin. Financial institutions and payment companies are banned from providing banking services for crypto trading in China, legislation that was enforced back in 2013.

The argument for a sentiment-driven correction is strong, but is it correct?

BTC and the crypto market as a whole were at the end of an unbelievable bull run. Pullbacks are a regular occurrence in the markets and prove to cool down overvalued, hot asset prices producing buying opportunities. While often alarming and damaging in the short term, corrections are a healthy phenomenon.

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A hot asset market coupled with billions of capital in leveraged positions, some as extreme as 100-to-1, could have been the catalyst for May 19’s precipitous fall. Why do highly leveraged positions lead to dramatic volatility?

Traders, predominantly corporate accounts, that take on leveraged positions are forced to sell when prices plummet. When traders use margin, they are essentially borrowing capital from a lender to take more significant BTC positions.

If prices crash, they pay the lending firm back what is formally known as a “margin call.” Typically traders or borrowing firms have hard-outs so they can pay the exchange back in full. CNBC analysts noted that liquidation prices tend to be similar across the market, often leading to a mass exodus. Selling frequently begets more selling until you reach an equilibrium point on leverage within a particular market.

In addition to billions in highly leveraged positions, the growing BTC lending market influenced the recent correction.

Lending Dominates DeFi Pulse

Rapidly growing behind-the-scenes was the lending category of DeFi. Total value locked in lending exploded from $17B on March 2 to $46B on May 11, nearly 3x growth in a little over two months. Crypto lending platforms like Celsius, YouHodler, and BlockFi enable holders to store crypto with the lending firm and enjoy an interest rate of between 6–8%.

While retail lenders slowly grow their crypto holdings with passive interest, the borrowing firm will lend out BTC to hedge funds and professional traders.

The Conclusion

There were numerous macro and micro forces at play in the recent May 19 crash. Elon, China, and some vague government regulatory concerns probably got the ball rolling while leveraged positions coupled with a rapidly growing lending sector intensified the result.

There is, however, another school of thought.

Maybe sentiment had no play, and the initial trajectory reversal was purely “natural,” driven by hot asset prices. If this was the case, traders didn’t necessarily want to sell their positions, so asset prices should rebound once the market gathered collateral. This has yet to come to fruition.

How does May 19 compare to previous major BTC corrections?

• In 2012 a Ponzi scheme incited a 56.3% drop in BTC.
• In 2016 China’s ban on BTC coupled with the widely known Mt. Gox hack started an 86% decline.
• In 2018 a $530M hack on Japan’s largest OTC crypto exchange stirred up market turmoil.

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Historically, the crypto market has suffered during hacks and scams, central government regulatory concerns, and bearish tweets from famous figures. The relatively recent lending market growth is a unique attribute to this particular correction, exacerbating what was possibly a natural market movement.

Amidst the slew of liquidations, numerous high-profile crypto advocates like Michael Saylor, and surprisingly, Elon Musk, spoke out, reaffirming the public of their bullish thesis and publicizing their BTC purchases.

Crypto markets are still in the early days and must complete a lengthy maturation period. Volatility is a characteristic that is inevitable with immature markets. Despite BTC 60 day volatility decreasing steadily, showing elevated trading volume and usage, traders should expect more volatility on the horizon.