Is Bitcoin About to Suffer a Big Crash?

These fears have been sharpened by the fact that bitcoin suffered a technical correction towards the end of November, when its price dropped by over $2,000 in a few hours. But while a similar short-term drop may happen again, it’s highly unlikely that bitcoin will suffer a ‘cataclysmic’ crash, as it did in 2017. Because compared to 2017, there has been a significant influx of institutional money into the bitcoin market, something which will prevent drops from being too severe or long-lasting.

A ‘Bitcoin Crash Is Coming’: The Evidence

There are some indicators that bitcoin could suffer a substantial crash in the coming weeks or months, but none of them are especially conclusive or convincing.

As mentioned above, bitcoin shorts have hit record highs on a number of occasions in recent months. On December 1, London-based analytics firm skew noted that leveraged funds are “record short” on CME Futures.

Source: skew/Twitter

What this means is that the vast majority of leveraged funds on CME Futures are betting that the bitcoin price is going to dive pretty soon. This has been a general trend since October, when the volume of shorts on Bitfinex began rising in the face of a rising bitcoin price.

Source: Datamish

However, while the volume of shorts has been rising over the past couple of months, this isn’t really hard evidence of an imminent bitcoin crash. As the chart above reveals, shorts were at their highest this year in April, when the bitcoin price recovered following March’s infamous crash. In this case, short-sellers were wrong that bitcoin would fall, so their rising numbers are hardly proof that bitcoin is due for another collapse now.

Likewise, even though short volumes are rising, and even though leveraged funds on the CME Futures platform are at a record short, most of the market is actually long bitcoin.

Source: Datamish

Another potentially worrying indicator of a bitcoin crash is the fact that bitcoin suffered a technical correction towards the end of November, and that it crashed spectacularly in 2018, when it lost around 82% between December 2017 and December 2018. It’s possible that, given bitcoin’s historical unpredictability and volatility, it may crash once again this time around.

Source: Twitter

In response to such claims, it’s encouraging to note that bitcoin recovered very quickly from its fall on November 26, when it plunged from just under $19,000 to about $16,500. It’s also encouraging to note that, prior to November’s bull run, bitcoin had been enjoying a long run of stability, with its volatility exhibiting a long-term, gradual decline.

Source: TradingView

The chart above shows an increasing number of troughs in bitcoin’s historical volatility, with the gaps in between volatile periods growing in length (particularly in the final months of 2019 and the spring/summer of 2020). This is due not only to a growth in institutional investment, but also to a growth in the number of investors holding onto bitcoin for the long term.

The market is increasingly sitting tight on the majority of its bitcoin holdings, which is why there’s likely a stronger buffer between bitcoin’s current price and any potential collapse. As such, it’s hard to agree with naysayers such as Peter Schiff when they claim that the bitcoin ‘bubble’ is due to pop.

Source: Twitter

What About Tether?

One shadow looming over the current bitcoin bull market, however, is Tether. The stablecoin’s supply has ballooned to just over $19 billion in 2020, around the same time that bitcoin’s price has ballooned. Some critics therefore can’t help but draw a connection between the two.

Source: Nomics.com/Twitter

It’s hard to entirely shake accusations that the printing of Tether is pumping bitcoin’s price. Academic research published in 2018 found that “purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices.” Other research, published this April, has found that there’s no strong correlation between Tether printing and bitcoin price rises, although this research was funded by Ripple.

Given that Tether hasn’t ever undergone a full audit, it lacks the kind of transparency that would enable any rational person to exclude the possibility that its pumping bitcoin prices to some degree. This implies that if Tether were to somehow collapse or go out of business, the price of bitcoin might suffer significantly.

Source: Twitter

A Tether collapse is a real, if somewhat distant possibility. Its parent company, iFinex (which also owns Bitfinex), is being investigated by the New York Attorney General, accused of using Tether to cover up losses of $850 million suffered by Bitfinex. If iFinex were to lose its case, it could be irreparably damaged, although it’s uncertain as to when a ruling would be due and what exact punishments it might face.

However, even assuming the worst-case scenario of a collapse, it’s unlikely that bitcoin would be severely damaged. Its price may witness a short- or medium-term hit, but the recent influx of institutional money is likely to keep it above a certain threshold. Similarly, there are plenty of indications that Tether does feed a genuine demand in Asia, so even if it were to disappear, the demand would remain, and another stablecoin would likely replace it.

In other words, bitcoin would be left pretty much where it is. Yes, it would probably fall if Tether went down, but with institutional money flowing into the market amid a favorable macroeconomic climate, a crash of the magnitude of 2017 isn’t really likely right now.