Plummet in the blockchain: its inborn nature but also a progress signpost
May 19 saw a plummet of the blockchain. The price of bitcoin dropped from $42,000 to the lowest of $29,000. Most of the other tokens’ prices were cut in half. The total market value of the blockchain fell from $2.5 trillion to $1.6 trillion.
The sudden drop results from Musk’s “betrayal” of the blockchain as expressed in one of his recent tweets as well as China’s strict regulatory policies that, to some people, discourage Chinese investors from fiat withdrawal. Following the announcement of prohibiting member units from providing services for cryptocurrency transactions by Payment & Clearing Association of China, National Internet Finance Association of China and China Banking Association, the State Council of PRC also highlights the need to “restrain bitcoin trading and mining”.
The rumor that the blockchain has become a bear market starts to catch on. For laymen, the recent price fluctuations even indicate a scam and bubble burst of the blockchain.
High return with high risk
Such a huge decline in a single day is scary for investors who are used to the stock market and tend to forget the blockchain has its own characteristics. Since it is a 7 * 24-hour non-stop trading market, there are no market protection measures available like the traditional stock market, such as limit up, limit down and circuit breaker. In other words, the fluctuations in the blockchain can be more significant. It can be expected that without these protective measures, the stock market could face frequent and substantial fluctuations as well.
Another major difference between the blockchain and the traditional stock market is that blockchain users can trade tokens by themselves while in the traditional finance market, investors have to rely on stock exchanges to trade stocks. In other words, stocks are “under your name, but at exchanges’ hand”. Cryptocurrency, on the other hand, is in users’ own hands.
In the blockchain, a rapidly changing and developing industry, investors have higher expectations and great energy consumption. Although it seems to be an exaggeration to say that one day in the coin circle equals one year in the real world, it is not all that exaggerated.
So, is blockchain collapsing?
Plummet: an immaturity indicator but also a progress signpost
If you are an experienced investor in the global secondary market, you will find that the NASDAQ index, which is dominated by technology assets, has reached a relatively high point a month ago and started to go down. Leading technology companies like Tesla, have already faced a decrease of more than 30% from its high point. Now, it is finally bitcoin’s turn.
Asset appreciation is often accompanied by inflation. Ever since the outbreak of the CONVID-19, many state governments around the world, led by the United States, have been printing money to ease the economic pressure. US stocks, gold, and the blockchain field have ushered in a technological bull market.
As a relatively young market, cryptocurrency has not only a limited market scale but also extraordinarily high liquidity, which makes it more susceptible to price fluctuations, as evidenced by the significant and frequent rise and fall.
Besides, the blockchain is highly leveraged yet not well hedged. Centralized exchanges provide futures 125 times higher than that of DEXs. In DeFi, most of the loan products are also over collateralized, leading to high leverage. The liquidation of these loan agreements is performed by smart contracts, and therefore if extreme market conditions occur, serial blow-ups are very likely to happen, which may easily lead the market to a death spiral and bring the price very low. The on-chain daily liquidation volumes of May 19 (the US $614 million) and May 23 (the US $140 million ) respectively rank the top two highest on record.
Meanwhile, hedging tools in the blockchain are not well developed. The depth and liquidity of the centralized options fail to meet the market’s requirements, and issues plagued blockchain products and technology demand more innovations. Besides, the performance limitation also aggravates the risks faced by the blockchain.
All those factors led to the plummet on May 19.
Under the risk lie opportunities
The current blockchain is different from the prior bull market. The current bull market is supported not only by the global easy monetary policy but also by its strong fundamentals such as the development of blockchain technology. The transformation and value brought by DeFi to traditional finance, the wide application prospect of NFT, and the constant improvement of blockchain infrastructure are all different from the past bull market, which propels this round of bull market to go further.
Thanks to the openness, transparency and community-oriented governance, blockchain investors are presented with numerous opportunities to exchange ideas and learn from each other. It then comes naturally that innovation springs up and becomes the driving force for development.
