What Is Fuelling The Current Bitcoin Price Instability?

April 29, 2021, 2:00 PM AEST - 4 months ago

The price of Bitcoin has been on a roller-coaster of instability in recent days, but what is fuelling the dramatic slumps and surges? 

Whenever the price of a trillion dollar asset takes a sizeable tumble, speculation will abound as to the drivers of such instability. Are whales driving down the Bitcoin price so they can increase their vast holdings at discounted rates? Are Chinese electrical blackouts to blame for the falls? Or are possible changes to US capital gain taxation laws spooking crypto investors? 

Biden’s Proposed Tax Laws

Under President Biden’s proposed changes, capital gains taxes rates could hit over 43% for high income earners. This is a huge disincentive for investors who have profited from the surge in crypto markets as they may have to hand over a huge slice of any windfalls to Uncle Sam. Trading crypto is a volatile enough exercise without capital gain taxes, especially for newcomers who are not accustomed to the manic swings like unflappable long-term Bitcoin holders.

While there is no single answer, large and sudden falls generally indicate heavily leveraged trading positions being cleaned out. Unlike the stock market, crypto markets trade 24/7, and a fall in price while an investor sleeps has the potential to wipe out his/her positions. Rapidly falling stocks can also be suspended by an exchange so investors can pump liquidity into their trading accounts, but crypto markets are not equipped with the same circuit-breakers. Short positions are therefore ruthlessly liquidated, thus exacerbating the downward momentum.  

Bitcoin perpetual graph for leveraged traders via TradingView

Options To Short Bitcoin

What we know for sure is that there are many more options to short Bitcoin than ever before. Bearish investors can now short sell Coinbase, Tesla, MicroStrategy, or the Bitcoin itself to drive prices lower. For large institutional investors, this provides a massive opportunity to profit from the growing crypto space.  Investment banks have long used their financial weight and extreme leverage to drive down prices of stocks and commodities such as gold. Bitcoin is now big enough to attract their attention. Much can be gained by short-selling assets that then decline precipitously. 

For long-term crypto investors, wild swings are of mild concern. But for leveraged traders on Binance or other platforms, they are make or break occurrences. A correction of 2% or 3% has the potential to wipe them out. As crypto markets continue to expand and gain wider exposure, and large institutional investors enter the game, we can expect more not less of the roller-coaster style swings.   

Jackson Byrne – Crypto News Guest Author

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