After several months of bull run and a price higher than ever, the descent is proving to be full of twists and turns for Bitcoin. While China was behind the flash crash on 19 May this time, Elon Musk couldn’t sit on the sidelines. The billionaire has managed to stabilise the price of the cryptocurrency with a series of new tweets. The saga continues.
2021 : Bitcoin on a rollercoaster ride
A turbulent start to the year
The year 2021 had got off to a great start for the cryptosphere, led by Bitcoin. The king of cryptocurrencies even broke its record last month, reaching an all-time high (ATH) of €64,941 on 14 April.
However, the bull run very quickly gave way to a dizzying fall in the Bitcoin price from May onwards. This almost proves the old English adage “sell in may and go away”, which refers to the seasonal decline that sometimes hits the financial markets at this time of year.
However, Bitcoin’s rollercoaster price has nothing to do with the season. In fact, it is Elon Musk who controls the token’s weather.
On 12 May, the eccentric billionaire announced that Tesla was no longer accepting payment in Bitcoin for its electric cars. While the price of the cryptocurrency had been hovering at dizzying heights for several months, it fell below the €40,000 mark on 13 May. A fall from which the king of cryptocurrencies is still struggling to recover.
bitcoin price
The flash crash of 19 May
In the midst of this downward trend, a flash crash further altered the price of Bitcoin, which fell to €26,251 on the afternoon of 19 May. This represents a 30% fall in price compared with the ATH in April.
For once, Elon Musk was not to blame for this lightning fall in the price. The reason lay with China, where several self-regulatory bodies issued a statement on 18 May. The statement focused on the regulation of cryptocurrency transactions and stated that :
[their volatility] seriously undermines the security of people’s property and disrupts the global economic order”.
The statement was drafted by the China Banking Association (CBA), the National Internet Finance Association of China (NIFA) and the Payment and Clearing Association of China (PCAC).
The Reuters press agency was quick to publish an article about the Chinese institutions’ announcement. Its content was enough to send panic through the cryptosphere: it stated that China was banning cryptocurrencies and warned investors about crypto-speculation.
That was all it took to create a ‘panic sell’ among bitcoin holders, who sold their assets at lightning speed, causing the flash-crash of 19 May.
bitcoin price
Elon Musk: another Deus Ex Machina
While the space-loving billionaire was not behind the flash crash, he did help stabilise the price just after the panic sell-off.
The event took place – unsurprisingly – on Twitter, the Dogefather’s favourite social network.
Elon Musk posted two cryptic tweets, which had the effect of boosting the share price by $2,000 in ten minutes.
Elon Musk
In the first tweet, the emojis read “Tesla has diamond hands”. The expression “diamond hands” is used in the financial markets to describe a person who holds a position despite the volatility of an asset. With this tweet, Elon Musk confirms what he said after suspending bitcoin payments for Tesla: he will not settle the company’s bitcoins. This means that he still believes in Bitcoin, and that he thinks its holders should keep their tokens.
The second tweet is much less clear. In it, Elon Musk thanks Tesla’s “Master of coin”, i.e. Zachary Kirkhorn, its Chief Financial Officer. In case you didn’t already know, the billionaire has very officially filed this new title with the SEC (the US federal body that regulates and supervises financial markets). As well as naming his CFO ‘Master of Coin’, he himself had taken on the title of Tesla ‘Technoking’. Does this second tweet have a hidden meaning? It’s impossible to be sure.
What is China’s real position on cryptocurrencies?
Is it really a Chinese “ban”? In reality, the Chinese institutions have merely pointed to the existence of several anti-speculation laws published by the PBoC (China’s central bank) in 2013 and again in 2017.
In 2013, the PBoC asked Chinese exchanges to stop accepting bitcoin transactions, stating that tokens are “virtual goods that have no legal status or monetary equivalent and should not be used as currency”.
Following this partial ban, the PBoC began a tougher crackdown in 2017. While it did not ban cryptocurrencies completely, it did ban ICOs (Initial Coin Offering), i.e. fundraising using virtual currencies.
Despite these Bitcoin-related regulations, it is important to know that China is not at all closed to the use of cryptocurrencies and blockchain. In fact, the country continues to trump Bitcoin mining, accounting for half of the computing power (“hashrate”) needed to mine its blocks. It has to be said that, as well as having an ideal climate, China is a technophile country and offers low-cost electricity.
However, according to some observers, the Chinese political authorities would not look favourably on the widespread use of cryptocurrencies, not least because it would lead to a loss of control.
Cryptocurrencies are based on a decentralised network that is difficult to control. This system is incompatible with Chinese policy.
We spoke to you very recently about the digital yuan, which China would like to introduce as early as next year. This would be the first cryptocurrency to be issued by a state and would be equivalent in every way to the national currency. This project could well be interpreted as an attempt to retain power over virtual currencies.
Similarly, the Chinese authorities banned Bitcoin mining in Lower Mongolia two months ago, after halting subsidies aimed at reducing the cost of electricity in this autonomous region. While China cited environmental reasons (coal still being used in the majority of cases), these restrictions demonstrate a desire to limit cryptocurrency mining in order to keep the situation under control.
Conclusion
The cryptosphere seems to have interpreted Elon Musk’s announcements as support for Bitcoin, given that its price rose very quickly after his tweets were published. The panic of 19 May has passed, but the king of cryptocurrencies has still seen its price fall considerably in just one month. The market is likely to have a hard time coming to its senses, and it is possible that a short pause will give way to a life-saving rebound in the weeks ahead. As for the announcements made by Chinese institutions, they sound like repetitions of past statements. China’s position on cryptocurrencies remains unchanged, so the flash crash seems out of all proportion to the content of the statement. Be that as it may, 2021 promises to be another eventful year for Bitcoin.
