On May 8, the date Tesla CEO and Dogecoin advocate Elon Musk hosted Saturday Night Live, the total market cap of all cryptos was about $2.5 trillion.

Since then, the market has lost over $800 billion in value, and prices continued to plunge on Friday.

In today’s Market Insights video, I look at some of the negative headwinds that are facing cryptos — and why the sell-off is a potential buying opportunity.

The Crypto Sell-Off is Your Buying Opportunity

Today, I want to talk to you about the crypto market and the recent selling that we’ve witnessed there, and why I think this is ultimately shaping up to be another great buying opportunity for crypto investors.

I want to look at the negative headwinds that we’re seeing facing cryptos, and also the other aspect of the selling that we’re seeing. And that’s the market mechanics of the sell-off.

They kind of build on one another. And I think market mechanics are more instrumental to the selling that we’re seeing recently.

So, first things first: Elon Musk.

You’ve probably already seen it or read about it: Elon Musk hosted a Saturday Night Live that was dedicated to Dogecoin. He pretty much confirmed the Dogecoin joke, calling it a “hustle.”

And if you look at a chart of total market cap of cryptocurrencies, they peaked at $2.5 trillion on that night. Last time I checked, it was about $1.7 trillion. So, it’s trailed off quite a bit.

And Musk came back and criticized bitcoin specifically, and said Tesla would no longer be accepting bitcoin as payment. This is a reverse course from where he was a couple of months ago, where Tesla bought bitcoin and decided it was going to accept it as payment.

If you aren’t aware, he cited environmental concerns for bitcoin. But he cited coal as an example that was being used for bitcoin mining, and I don’t quite agree with that.

I’ve looked at the research, and it said 76% of bitcoin miners actually function from renewable energy. So, that statement doesn’t necessarily check out from the research I’ve seen.

Also, he criticized the aspect of decentralization for the bitcoin network and basically said that bitcoin is not decentralized because a lot of bitcoin is held by a small amount of people. That’s true. I don’t disagree with that criticism. But that isn’t true about all cryptocurrencies.

Nonetheless, we did see a sell-off in all cryptocurrencies. And it’s kind of like the situation that you might witness in traditional markets, where you’ll see selling in one or a couple of stocks, and it really brings down the whole market in the short run.

It’s really a sentiment-driven thing. People are just selling because other people are selling, and they’re using this as a time to sell.

Also, the Chinese government — and it’s news, but it’s also not — it banned cryptocurrency transactions.

What I mean by that is it banned the exchanges and initial coin offerings, or ICOs. It also banned banking institutions and payment providers from doing business with cryptocurrency exchanges. But it didn’t ban holding cryptos.

Like I said, it’s not really news because this has been a development that has been ongoing. China has been regulating and threatening cryptocurrencies for years.

So, it’s more or less the timing of this announcement that makes it worse when sentiment is already poor and there’s more fuel to the fire. The market digests it a little harsher than if it was just news coming out without poor sentiment. So, what this ends up doing is it takes cryptos down from all-time highs.

You have people that want to sell into that news. It’s not a bad time, per se, because cryptos have rallied. A lot of people have been in for a while. And what that does is it brings down crypto in the short run. But really what that causes is more of a market-mechanic-driven sell-off.

My colleague Ian King has mentioned this in his crypto service that we offer, specifically liquidations and how that affects crypto prices.

So, an easy way to look at this is: As times are good and the markets are going up, whether that be crypto or stocks, traders will get greedy, they’ll borrow what they don’t have to buy more of something.

They may borrow stock so that they can buy more of it, or they may buy borrow crypto so they can buy more crypto. Basically, they’re increasing their exposure in a process of leveraging to try to get bigger gains.

Now, by doing that, they have to post a certain amount of collateral, basically an asset that they have to hold for that borrowed position. And as the value of cryptos that they’re borrowing goes down, their value of their collateral also presumably goes down.

So, what that means is there has to be more collateral posted by the trader to hold that position. And when that’s no longer possible, or the trader no longer wants to post more collateral, they get their position sold out forcibly in a process known as a liquidation.

So, what ends up happening is when prices go down and there’s liquidation, it creates more liquidations, more or less like a snowball effect. And it creates a cascading price because as more liquidations occur, it increases the supply of sellers.

These sellers have to sell at the market price. They’re not going to be able to pick their price because they’re being forcibly sold. So, it creates an oversupply, driving down prices, and new sellers have to sell at lower prices.

The end result is a flash-crash-type scenario like we’ve seen where prices just drop out and there’s huge price swings during the day. We’ve seen this in the traditional financial markets, and obviously those have rebounded. We’ve also seen this in the past in the crypto markets.

Last March, in the thick of the COVID-19 crisis, bitcoin fell 50% in a day in what’s known as Black Thursday. Since then, it’s been on a roll. It’s up over 900%. Even after the last sell-off, altcoins are doing even better, up over 1,400%.

So, that gives you an idea of how the market mechanics of selling really create a huge buying opportunity over the long run. For new investors, and for seasoned investors even, look at this as a potential buying opportunity.

It’s a testament that you should buy cryptos slowly over time, especially with the high volatility that these markets entail. And that’s going to allow you to better weather these periods of volatility and take advantage of depressed prices when they do come.

Stay bullish on crypto. We’re still bullish on crypto. We’ll let you know if anything changes.


Steve Fernandez

Research Analyst, Strategic Fortunes