Maxim KimerlingTASS via Getty Images
- Bitcoin, ethereum, and other cryptocurrencies have experienced a wild few weeks.
- The price swings are nothing new for crypto, but with newfound mainstream acceptance, volatility presents issues.
- Insider spoke with cryptocurrency experts to see how the recent "stress test" has affected the community.
- Sign up here for our daily newsletter, 10 Things Before the Opening Bell.
On April 11, 2021, the price of bitcoin rose as high as $63,729.50 as enthusiasm surrounding the crypto market swelled.
Coinbase, one of the largest cryptocurrency exchanges, was set to go public in just three days, and Tesla had said it would begin accepting bitcoin as a form of payment for its vehicles.
A month and a half later, bitcoin is trading below $40,000 per coin, Tesla is no longer accepting bitcoin, and Coinbase stock is down roughly 30% from its all-time highs.
For new entrants to the crypto world, this kind of volatility can be disturbing, but for old hands, it's nothing new.
In fact, bitcoin experienced six pullbacks of more than 30% in 2017 alone, despite the price rising more than 1,000% that year.
Still, considering the rapid growth of new cryptocurrency holders and an increasing institutional interest in the space, swelling volatility can be an issue.
Below, Insider breaks down how cryptocurrencies' wild few weeks have affected the industry.
From miners to the DeFi companies, the crypto community has been forced, once again, to navigate price swings. Here's a look at how they made out according to the experts.
Traders and Investors
Some short-term traders and long-term investors were greatly impacted by bitcoin's recent price swing, but for others, it was business as usual.
The majority of the pain dished out by falling prices in cryptocurrencies was felt by new entrants to the space looking to make a quick buck by trading but ended up sellig coins at a loss.
According to data from Glassnode, "there is no question that a large portion of the recent spending activity was driven by short-term holders, those owning coins purchased within the last 6-months."
Insider spoke with Todd Jones, the chief investment officer of the wealth management firm Gratus Capital, to confirm Glassnode's findings.
Jones said that none of his long-term focused clients have been selling their cryptocurrency and noted that much of the sell-off in bitcoin's price was a result of traders' "leverage unwinding."
On-chain margin traders raced to exit their leveraged positions when cryptocurrencies faced their most recent bout of volatility, according to a May 19 Daily Gwei newsletter.
Ethereum gas fees (the fee required to successfully conduct a transaction on ethereum) surged to record highs as a result driving "gas wars amongst liquidators and arbitrageurs," according to Delphi Digital.
"The price was falling so fast that people were getting scared for their on-chain leveraged positions and were willing to pay anything to get their transaction included in the next Ethereum block (presumably to close their positions)," ethereum developer Anthony Sassano speculated, per Coin Telegraph.
Bitcoin traders using up to 100-to-1 leverage also rushed to sell, furthering volatility in the asset.
This leverage unwinding added to cryptocurrencies' woes. However, for long-term holders of ether and bitcoin, the price drop and rising gas fees weren't relevant.
Essentially, the most recent bout of volatility hurt traders far more than long-term investors, who still believe their holdings will appreciate moving forward.
"Recent price volatility should not be very impactful to a long-term holder of BTC. It comes with the territory. Any asset that can go up 800% in a year also has the potential to collapse 90% (similar to the early days of AMZN). Price volatility goes hand in hand with speculative assets," Todd Jones of Gratus Capital said.
In Jones' view, now is a "good time to add" to cryptocurrency holdings as a part of a diversified portfolio.
Miners
Cryptocurrency mining, and in particular bitcoin mining, has become a multi-billion dollar business. Publicly traded miners like Riot Blockchain, Marathon Digital Holdings, and Hive Blockchain have expanded their operations amid a meteoric run for the crypto space.
However, like all mining operations, the value of the end product is a critical component to securing profitability.
Insider spoke with Phil McPherson, Riot Blockchain's vice president of capital markets, to delve into how cryptocurrency price swings can affect miners.
McPherson said that when bitcoin's price falls, miners could be forced to sell coins in order to continue their operations. The key is the mining cost per coin, which varies greatly depending on the company.
"Smaller miners with higher fixed costs and costs of goods would probably be hurt more," McPherson said.
The VP added that his company is in a "unique position" due to its strong balance sheet. Riot ended the first quarter with $241 million of cash on hand and an average cost per coin mined of around $15,000, enabling them to keep all the bitcoin they mine and continue operations even in a down market for the digital asset.
"On a daily basis, we're mining call it six or seven bitcoin a day, sometimes it's higher, sometimes it's lower, but we're not selling that bitcoin, we're stacking it," McPherson said. "So the fact that we're bullish long term, the price volatility hasn't affected our business from a financial standpoint because we're not selling it into this depressed market."
McPherson noted that when bitcoin's price falls, the global hash rate (the difficulty of mining the currency) falls as well, which is actually a benefit for miners who can remain in operation.
"From our perspective, the volatility in some ways has been good for market leaders like us," McPherson added.
DeFi
Decentralized Finance, or DeFi, is a system that allows users access to financial products on a public, decentralized blockchain network.
Most DeFi companies use the ethereum blockchain to run their operations, and the total value locked on the DeFi network is now over $62 billion, according to data from Defipulse.com.
DeFi applications include stablecoins, lending platforms, prediction markets, and much more, and the industry allows traders to profit from tactics like yield farming and liquidity mining.
Jeff Dorman, CFA, the chief investment officer of the digital asset management firm Arca, told Insider the recent volatility in cryptocurrencies was a "real stress test" for the DeFi space.
According to the CIO, DeFi companies passed this latest test without issue, but in the past, that wasn't always the case.
Dorman pointed to differences in the DeFi system amid recent price swings compared to volatile periods from the past.
The CIO gave an example of MakerDao, a popular DeFi lending and borrowing platform, that "basically broke" in March of last year when the crypto market saw a steep drop in pricing and was forced to take $4.5 million in socialized losses from the event.
"There was price feed issues with regard to their API connectivity, and as a result, borrowers were being liquidated even though they shouldn't have been because of a price issue. MakerDao had to socialize those losses and raise new money and pay back all the victims over time," Dorman said.
This time was very different, however, according to the CIO.
"This time around, it was the exact opposite. I can't give you an example because nothing happened. Every price oracle worked, every decentralized exchange worked, every decentralized lending and borrowing platform worked, every decentralized insurance company worked. I mean, it was unbelievable to see," Dorman said.
The CIO pointed out that centralized entities in the crypto world like Coinbase and Binance "were all having problems" with price volatility this time around. DeFi companies, on the other hand, were able to navigate the price swings without issue.
DeFi liquidations did rise 14-fold during the broad crypto sell-off, Debank data shows, as traders in the space looked to protect themselves from losses.
However, at the end of the day, the crypto community was able to whether recent price drops and volatility fairly impressively.
Some traders, especially those using excessive leverage, were hurt, but overall, the industry kept on trucking in what will likely be thought of as a positive sign for the future of the space.