What Spooked the Market?
There’s a lot to unpack from the last 48 hours in crypto markets. While many people in the US were either traveling to see relatives for Thanksgiving or preparing a socially distanced holiday ready to zoom with extended family and partake in a virtual feast, we experienced the first real challenge to the BTC rally of 2020
In the evening hours of Wednesday night, Brian Armstrong, the CEO of Coinbase, tweeted that he thought it was possible that the Trump Administration, and Steven Mnuchin in particular, might try to rush through restrictive legislation on self hosted crypto wallets. While this type of legislature would not explicitly prohibit crypto or trading, it could potentially make it very difficult to move crypto from wallet to wallet unless those wallets are hosted by financial institutions. It could potentially amount to a de facto corporate takeover of crypto.
While legislature like this is entirely a rumor so far, and I personally don’t know of any solid evidence that these discussions are taking place or if rules like these might become reality, the fact that real concern was being voiced by someone with as much crypto clout as Armstrong was easily enough to spook markets, especially during a time of reduced liquidity.
The initial selloff kicked off liquidations on offshore exchanges that offer leverage through perpetual swaps, which accelerated the down move. Later as the crypto community digested the market moves and assessed the situation, prices continued to drift lower, though not as sharply as in the liquidation induced first drop. During this time, another piece of legislature from the UK regulators about an impending ban on marketing crypto derivatives to retail investors was also circulating, though I don’t believe that this second piece of information was anything new or particularly impactful. Still, in a spooked market, anything that raises anxiety levels can have a chilling effect.
What will happen next? Bottoms only occur when sell imbalances clear and support returns. The Friday following thanksgiving is a notoriously thin trading day with significantly reduced liquidity, at least in the equity world. As many institutional traders are taking the day off and the stock market only trades for a half day today, I think it is likely that we won’t know the real level where the profit takers and regulation wary bears finally balance out with the maximalists and institutional buyers until Monday at the earliest, and maybe not until after then. In the meantime, I’d expect choppiness as this new regulatory fear continues to cause ripples.
Of course, if we were to actually see some real guidance on impending legislation, that might change things very quickly, for either better or worse. But until that happens (if it ever does), crypto traders will be on edge.
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