Bitcoin's drop affected a $1.3 trillion industry centering on speculation and leverage. Crypto loans, options and futures bore the brunt of Bitcoin's plunge as it wiped out strategies for continuous income. It also reminded bullish investors of the need for restraint as trading activity waned.
Crypto prime brokerage firm Bequant CEO George Zarya said that the hype surrounding Bitcoin "has toned down." He continued: "It's a 24/7 market, so for the entire industry it's an exhausting process. When summer comes, it's very timely. You need a little bit of rest."
According to data from CryptoCompare, spot and derivatives turnover amounted to a total of $2.6 trillion in June. The figure was on track to reach its lowest level since December 2020, the website added. Furthermore, the number of active and new Bitcoin addresses also fell. Crypto futures and options website Deribit meanwhile reflected a bullish sentiment toward Bitcoin, with its volatility rate rising to 88 percent from a recent low.
Speculators who engaged in the once-lucrative basis trade saw losses this time around. In April, Bitcoin's price was projected to hit $100,000 – something some traders capitalized on. They shelled out huge amounts of money in anticipation of potential profits once the cryptocurrency peaks. However, Bitcoin's price dropped in May, causing interest rates paid by bullish investors to roll over their futures to hit zero or even reach negative.
YRD Capital Co-Founder Yuval Reisman remarked: "The last month and a half has been challenging for the cash-and-carry traders. The professionals prepared for a rainy day, by developing more strategies."
Bitcoin's collapse is a question of "when"
According to Reisman, Bitcoin's performance over the past month and a half had been flat – with a 30 percent gain recorded for 2021. The CME Group Inc. exchange also reflected a similar sentiment for Bitcoin with a nearly flat performance. This starkly contrasted with few months ago that showed a steep curved, signaling an optimistic outlook.
The future-focused world of decentralized finance (DeFi) also saw trading activity slow down with Bitcoin's plunge. The total value locked in DeFi fell to $54 billion, compared to its $89 billion value when it peaked in May 2021. Many staked coins in cryptocurrency pools such as DeFi to take out loans and earn huge yields. However, falling token values and bullish sentiment put an end to this.
Data from cryptocurrency loan website LoanScan also showed interest rates for lending platforms on a downtrend. For instance, those for several lending platforms for the USD coin – pegged to the actual U.S. dollar – dropped to around 2 percent. During the period before April 2021, interest rates routinely rose above 10 percent, the site said.
A July 20 CNBC report expressed further pessimism toward Bitcoin as its price briefly dropped below the $30,000 mark. Other cryptocurrencies such as ether and Ripple also fell as a result of Bitcoin's plunge. Analysts backed up the bearish projection toward Bitcoin, saying that it could potentially fall as low as $20,000. (Related: Drop in cryptocurrency prices raises questions about their stability.)
According to Annabelle Huang, a partner at crypto financial services Amber Group, the fall is happening because of "concerns of the quality and strength of economic recovery" as well as "broader risk assets turned weaker including high yields."
"Coupled with recent Bitcoin weakness, this just sent [the crypto] market down further," she added.
Kenetic Capital Founder Jehan Chu meanwhile cited the Chinese government's cryptocurrency crackdown for the dive in Bitcoin prices. "All signals are red as Bitcoin continues to be weighed down by China's ultimate crypto ban and worsening macroeconomic conditions from a surge in [SARS-CoV-2] variants," he said. (Related: Chinese crypto crackdown causes Bitcoin prices to plunge.)
Vijay Ayyar, business development head at crypto exchange Luno, commented that regulators are setting their sights on Bitcoin and other cryptocurrencies. "In general, we're seeing more regulatory focus on crypto and Bitcoin," he said. Ayyar projected that Bitcoin prices could hit the low $22,000 to $24,000 level. "I would see Bitcoin between [$22,000 and $24,000] for a while now before any bullishness returns," he added.
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