There has been a great deal of excitement in the industry in the past few weeks; the market was finally recovering from its crash in May, several altcoins hit all-time highs, and all eyes were on El Salvador as it became the first nation in the world to adopt Bitcoin as legal tender.
But just as soon as the highly anticipated adoption arrived, the markets responded with almost all major coins losing 10% to 15% in a matter of hours. According to data from Bybt.com, US$2.7 billion was liquidated from the market in an hour.
Bitcoin, which had been briefly trading above US$52 for most of Tuesday, has lost 15% since then and was trading at US$45,232 at press time. A massive selloff on the day of El Salvador’s adoption might not have been the ideal start for the project, but President Nayib Bukele was trying to make the best of the situation, announcing on Twitter his government had “bought the dip,” adding 150 BTC to its position. This is in addition to the 400 BTC the country purchased in the lead-up to the adoption.
Despite significant losses across the board, industry experts are not too concerned, seeing the plunge as fairly normal market behavior. “It was a classic case of buy the rumor, sell the fact,” said Martha Reyes, head of research at digital asset prime brokerage and exchange Bequant, explaining there was a great deal of excitement in the lead-up to the adoption that may have already been priced in before the market reset.
“Generally, this shake-out is healthy,” she said. “We’ve seen similar moves before run-ups in bull markets, such as in November of 2020.”
The run-up
Right before the dip, Bitcoin had breached the US$52K for the first time since mid-May, amid a major market-wide crash in which the world’s largest cryptocurrency reached its all-time high of US$63,503, according to CoinMarketCap. That selloff was triggered by a few significant developments in the industry; first, Tesla CEO Elon Musk announced the company was no longer planning to accept BTC for its electric vehicles, citing environmental concerns of its proof-of-work consensus algorithm. Second, China began a heavy crackdown on Bitcoin mining in the country, as region after region outlawed the practice.
One strong indicator of the strength of the Bitcoin network was the recovery of its hash rate over the past few months following the mining exodus from China. Bitcoin’s hash rate refers to the level of computing power required to secure the network. Recently, Bitcoin’s rally coincided with its seven-day moving average of its hash power rising from 110 terra hashes per second to 126 terra hashes per second, according to an August market report by global crypto exchange Kraken, shared with Forkast.News. The report also indicated BTC recently saw its third consecutive difficulty adjustment — another sign of strength in the network.
“But one of those things [that was attributed to BTC’s last dip] was the news in China and the exodus of mining and hash rate, therefore, dropping quite significantly,” said Jonathon Miller, Australian managing director of Kraken. “There was some concern about the strength of the network. Most of that mining capacity is now finding homes in other jurisdictions — in the U.S., especially. And yet the hash rate has been increasing and that’s a sign of strength and competition in the underlying proof of work protocol.”
These are not just signs of a healthy network, but could also explain the price rally that accompanied it. “What’s important to note is the impact of miners coming on stream now after the China ban, [after] the relocation’s happened,” says Caroline Bowler, CEO of Australian cryptocurrency exchange BTC Markets. “The data has shown that they’re coming back on stream again. And with that, I see they saw those prices and thought it’s time to make a few pennies and started to sell their Bitcoin.”
For Bowler, this kind of volatility is to be expected with cryptocurrency — especially when so many coins are hitting all-time highs — and while she doesn’t describe herself as necessarily bullish on Bitcoin, she describes this type of market behavior as almost “standard operating procedure.” She also would not want people to take this momentary dip as a reflection on the future prospects for El Salvador’s Bitcoin adoption.
“This is a 12-hour snapshot post the launch of something that is — let’s be honest — quite audacious,” she said. “For a country of its size and where it is, its own economic development, particularly when it faces off to the likes of the World Bank and the [International Monetary Fund], who we know are quite entrenched in their views when it comes to Bitcoin encryption. They’re making, as I say, really audacious moves.”
Ethereum and the rest
Just as Bitcoin was having a strong run in the past few months, so too was the world’s second-largest cryptocurrency, Ethereum. Driven by the explosion of non-fungible tokens and the decentralized finance space, Ethereum came even closer than Bitcoin to reaching its all-time high than Bitcoin did in this most recent run, briefly breaking the US$4,000 mark earlier this month.
NFTs have become the hottest items in cryptocurrency this past month, with record sales volumes on NFT projects such as Bored Apes, CryptoPunks and NBA Hot Shot amassing hundreds of millions of dollars in sales each. While a few blockchains are hoping to knock Ethereum off its number two perch, for the meantime, the vast majority of these projects are minted on Ethereum. It’s not only reaping the rewards for itself but also having a positive impact on the market more broadly as well.
“[Ethereum] has been also a bit of a driver that BTC is almost being dragged up a little bit by the run-up on Ethereum,” Miller said. “It’s benefited not only from that kind of stabilization at the base layer but institutional adoption and use as well.”
Remarkably, aside from stablecoins, one coin in the top 10 managed to resist the worst of the sell-off: Solana. While it was still trading down 9% within the last 24 hours, it is still trading at 45% higher than it was at the start of the week. Currently the world’s seventh-largest cryptocurrency with a market cap of US$45.4 billion, Solana only entered the top 10 a few weeks ago amid a historic run, reaching an all-time high of US$193.27 on Tuesday.
Marketed as a competitor to Ethereum, Solana sports impressive transaction speeds — 6,000 times faster than Ethereum and 40 times faster than Visa — and has recently launched a cross-chain communication bridge, Wormhole. It also supports NFTs; its first series “Degenerate Ape Academy” sold out of its 10,000 unique pieces in eight minutes after launch.
“People have realized that Ethereum can be extremely costly and slow,” Miller said. “Solana just happens to be a project that is cut out for NFTs. It fits quite neatly into that space, and there have been some successful issuances of NFT on the platform, and the experience is faster and lower cost because there’s less demand. But it feeds the cycle that this is a meaningful alternative.”
“The positive thing about Solana is you’re seeing people using it, it’s not just a kind of speculative thing.”
One thing this recent run has shown is the strength and utility of more tokens come to the fore —such as Solana — and all bring different categories of use cases, something Miller says can only be a good thing for the industry.
“In the past, it used to be, I think, Bitcoin and the rest. And now you’re seeing a much more kind of steady-state line up of the different categories,” he said. “All sorts of platforms — including obviously decentralized exchanges and things like that — have seen a huge amount of growth throughout this year. And I don’t see that stopping either.”
