Last Wednesday, June 26, around 1p.m. PT, as Bitcoin skyrocketed toward $14,000, there was a sudden and stunning retracement, sending the cryptocurrency on a freefall from whence it came, bouncing in the $10,000 to $11,000 range. The market, which had been up nearly 60% for the week, gave back most of its gains. According to CoinDesk, $250 million traded in the 5 minutes surrounding the initial price drop and $690 million in the 15 minutes that followed, resulting in outages at both Coinbase and Robinhood.
Bloomberg barely mentioned the rally or the crash on TV, and chatter was relatively quiet on social media compared to January 2018 when $14,000 was last seen.
So what was going on?
I talked with crypto pundits, Jimmy Song, venture partner at Blockchain Capital and author of Programming Blockchain; Alex Frenkel, GM of Kin Ecosystem; Michael Terpin, CEO of Transform Group and co-founder of BitAngels; and Alex Mashinsky, founder and CEO of Celsius Network. What follows are their views on the likely causes of the wild parabolic swings.
The Halving
“I think it’s latent demand front-running the halving as mining rewards go from 12.5 to 6.25 next May,“ Song told me.
Frenkel further explained:
“Bitcoin is released every ten minutes to miners who invest electricity, human resources, research and hardware to build the network. To pay their bills, miners need to sell some of their newly-minted bitcoin to buyers. Since the supply is finite, there is scarcity in the halving process, and thus, over time we see a steady, gradual increase in demand and pricing. It’s a very consistent trend, every four years, in three parts. There’s a beginning, middle, and end. In the first third, you see a huge bubble. Second third, you see a crash and it goes back to half of where it was at the peak. Last third, everyone gets back in, but not in a linear way. The overall direction is very stable and will continue every four years for the next hundred years, until the last bitcoin is mined, which is expected to be around 2140.”
To illustrate, Pantera Capital tweeted this chart on March 28, 2019, right before the April Fools run up that moved Bitcoin out of the $3K realm:
“We have seen a couple of these cycles where the tide begins to shift roughly a year before block reward halving dates. Inflection points occurred 376 and 320 days prior to the 2012 and 2016 “halvings” respectively. Next halving is expected May 24, 2020.”
Frenkel added, “In the short term, over days or weeks, news can move the market. We saw this around Consensus in May and around the Facebook Libra announcement (on June 18). A big whale moving or a hack on an exchange, can cause implications on the price, but in the long term the overall trend is up.”
The whale in the room
As for the massive sell off, Terpin explained that it appeared to be triggered by profit-taking by an unidentified whale. He shared with me a whale alert that was issued by Crypto Potato before the crash.
“CryptoPotato noticed the move before it happened. One major whale sold 8,884 bitcoin valued at over $100 million on Coinbase—likely bought most or all of it back at bottom on multiple exchanges and pocketed the $15 million in cash. This happened a few weeks ago on Bitstamp. Cooling a rally and popping a bubble are different—the whales both appear to have bought back in and will likely keep doing this all the way up,” he said.
Commenting on whether this was the cause of the Coinbase crash, he added, “8,884 bitcoin can chew through an order book pretty quickly.”
I asked if the rally was real, he replied, “Yes, the rally is real but so are pullbacks. The uptick is definitely anticipation of the halving and lower supply coupled with higher demand. Bitcoin is a volatile market but it’s always an early bull market going into a halving and even more so for a year afterwards, until the price overshoots then pops.”
“What about the sentiment that the halving argument is nonsense, that the market already priced it in since it was a known event?”
“Known to whom? Not to new investors. Every halving certain people wonder—will this rise happen again? More? Less? Once the market acts in a certain direction it reinforces beliefs,” he said.
“How low could it go?” I asked.
“I don’t see this correction going much below $10,000, if that. Three thousand dollars will never be available again, $6,000 will never be available again. I doubt this correction goes much below $9,000 as buyers will back up the trucks knowing it’s likely to hit $15,000 by the halving,” said Terpin.
Mashinksky, who runs a platform that provides interest and credit to Bitcoin holders, agreed, “There’s always a floor that’s higher than before. Celsius doubled deposits from April to May and again from May to June during this run up. We’re seeing people don’t want to sell their bitcoins, they want to keep it as a store of value.”
House of Cards
Bitcoin’s adventures were bantered about at VentureCrush SF, a gathering of top venture capitalists that took place not too far from Bitcoin 2019, where hundreds of core developers gathered for their annual conference. Founders and funders who are not invested in fintech shared with me their concern that a small number of players could easily manipulate bitcoin prices and move the market, as evidenced by the big selloff.
This was also a worry raised at SXSW 2019, when Song was asked by his fellow panelists about the fiduciary duty of the Bitcoin core developers to bitcoin holders and businesses building out the ecosystem. Only five guys in the world control the codebase that the $200 billion Bitcoin blockchain rests on; these are the Bitcoin Core Maintainers: Wladimir van Der Laan, Jonas Schnelli, Marco Falke, Samuel Dobson, and Michael Ford.
Unlike Bitcoin itself—which is open, transparent, democratic and decentralized—the five maintainers are chosen behind closed doors at a private invitation-only event. Surprisingly, the voting process has no public viewing. There’s a lot of trust placed in the hands of these five guys. What if ethics or competencies are compromised? What if any of the five maintainers conduct insider trading by shorting when they find bugs? What if they go to a party together and something terrible happens to all of them?
With these key man risks, could institutions be building on a house of cards?
Song explained that if anything were to happen to the five maintainers, there is a large community of 40 to 50 developers who actively contribute to the code—and an even larger community of 500 developers who have contributed to date—who could replace them.
I asked Frenkel his thoughts.
“I don’t feel there is a real risk. From Day One, Bitcoin was an open source project. It’s now more than 10 years old. There is a strong alignment of incentives for developers who support the network to protect it as well. The code has been proven over many years, and if you think about it, the bounty to try to break it or change it in a bad way is tremendous and no one has ever been able to do it. There have only been hacks of exchanges, never to Bitcoin itself.”
“There are also a huge amount of nodes running today (over 10,000 according to Bitnodes). Anyone with a mobile phone can run a node. The beauty of Bitcoin is that it is truly decentralized. By its very design it cannot be taken down by a handful of bad actors.”
The long game
Many large investors like Tim Draper refuse to pay attention to the short term swings of Bitcoin. Even during the long crypto winter, Tim Draper did not waver from his prediction that Bitcoin will be worth $250,000 by 2023. In May, Draper added to his prediction that Bitcoin will make up 5% of the global currency market by 2023. And this past week at the Bitcoin 2019 conference in San Francisco, according to CoinDesk, he talked about a joke bet he made with Argentina’s president that if by 2023 Bitcoin was worth more than the Argentine peso, the country’s head of state would declare it the national currency.
The one thing that the crypto pundits agree on is that the trajectory is there. Libra doesn’t change anything, neither does the profit-taking by whales. They believe in the technology and are in it for the long game.