Black Wednesday

Market Recap

Crypto Takes a Dive


Black Wednesday

It has been a rough couple of days for anyone involved in crypto, so we thought we would add some commentary to the latest market movements.

At Etherbridge, our core investment philosophy revolves around the concept of reflexivity. Reflexivity speaks to the fallible nature of humans and how perceptions drive reality as opposed to reality driving perception.

Since the internet, the way society absorbs information has changed considerably. Before the internet, information flow was owned and controlled by financial giants. Today we obtain good and bad quality information from almost anywhere, whether in the Etherbridge blog, on Twitter, Reddit, Facebook, or your local news station. What drives the perception of the market is no longer the actions of this or that firm but instead tweets from a well-respected businessman.

Perception can, however, go one of two ways. This last week has proven just this. Elon Musk, a successful innovator and CEO of Tesla, went back on his commitment to allow clients to pay for cars in Bitcoin. He then commented on bitcoins energy consumption, Dogecoin and "how to make bitcoin better".

Regardless of what Elon thinks and decides to share with his cult-like Twitter following, here are the facts as we understand them:

Zooming Out Before Getting Lost in the Noise

Crypto assets have been on a crazy ride; it was not so long ago that I used to have fights with Mike about buying Ethereum at $200 and Bitcoin at $9000 (me arguing this was expensive). Today, we trade at $2700 for Ethereum and $39000 for Bitcoin. The market has been in a state of euphoria, and it's natural to see participants taking money off the table after such a stellar year. The market needed a gut punch and certainly got one.

Bitcoin and Energy

Bitcoin requires a lot of energy to secure the ledger from malicious parties. Bitcoin is, after all, apolitical non-discretionary money; we can assume there will be many people looking to attack it and remove it as an option for those seeking self-sovereignty. Our view on bitcoin and energy is simple: bitcoin requires miners; miners are people who use specialised hardware and expend electricity to process, execute and settle transactions. Miners have costs denominated in fiat (USD, EUR, etc.) and rewards denominated in bitcoin. Like any profit maximising business, these miners will seek to reduce their cost basis by seeking cheap energy sources, increasing overall margins around their mining activities. This creates a clear incentive for the use of renewables in bitcoin mining. Think about it this way, do banks become more profitable by using renewables to deliver their service? No. Do bitcoin miners become more profitable by using renewables? Yes.

Here are some of the best pieces on the bitcoin energy argument:

The Last Word on Bitcoin's Energy Consumption - Nic Carter

Nic Carter explores how electricity is produced and why it's costly to move over a great distance. He further explains how it shaped the current mining industry, its energy mix, and how excess power is being redirected to bitcoin mining. He argues that "ultimately it's just a matter of opinion as to whether the existence of a non-state, synthetic monetary commodity is a good idea".

The Frustrating, Maddening, All-Consuming Bitcoin Energy Debate - Nic Carter

Nic Carter follows on from his previous article and builds on his previous arguments. He asks whether it's worth spending societies energy resources on the production and maintenance of a non-state monetary system. He goes on to debunk some common bitcoin mining myths and compares it with traditional settlement systems. 

Bitcoin is Key to an Abundant, Clean Energy Future - Square and ARK Invest

In a collaborative effort, Jack Dorsey's payments company Square and Cathie Wood's ARK Invest explore bitcoin and its effect on clean energy. They explain how the Bitcoin network functions as a unique energy buyer that could enable society to deploy substantially more solar and wind generation capacity.

Who Were the Sellers in this Correction?

Building on the profit-taking trend, we have seen it's always important for us to reflect on who are the main sellers in this most recent market sell-off. Our on-chain fundamentals point to holders less than three months (wallets that received their first bitcoin less than three months ago). Since the market top on the 14th of April 2021, coins held for more than a year have gone from 55% to 54%, a very small sell-off from longer-term convicted holders.

Hodl waves represent the percentage of bitcoin held at various age bands. Currently, 54% of all bitcoin have been held in the same wallets for a period longer than a year.
Long-term holder net unrealised profit or loss. This clearly shows how longer-term holders have not been too affected by the recent correction and are nowhere close to capitulation.

Even the investors that fall into the six months to one year bracket increased their holdings through this correction. The majority of selling has come from new accounts that have been holding for three months and less. These are new entrants to the space, many of whom entered because of "idols" like Elon Musk’s endorsement of the space only to reverse their perception of what they were buying after ill-informed, unwarranted and factually incorrect statements made by Elon about bitcoin.

We have established that short term traders are the real sellers in this last downturn. The question now remains, are these disciplined institutions or retail investors? When thinking about accumulation and distribution in crypto, it's always good to check exchange inflows and exchange outflows. Inflows represent potential selling pressure whilst outflows signal confidence and people taking assets off exchanges to hold for the longer term. What is interesting about this downturn is that Coinbase (a US regulated exchange used by institutions to purchase digital assets) experienced significant outflows (accumulation) whilst unregulated platforms where a large number of retail traders trade, like Binance and Huobi, experienced large inflows (distribution).

Recycled China News

The last point of information that helped to change the sentiment to negative was a recirculated story about China banning bitcoin. Obviously, the media isn't a fan of bitcoin, but the narratives they push are becoming embarrassing; they can't seem to decide if they prefer the "bitcoin is controlled by China" or "China has banned bitcoin" narrative. Reuters initially released the story and claimed China had banned bitcoin whilst, in reality, Chinese authorities have issued a statement reiterating the bans on crypto transactions that were established in 2013 and 2017. So again, this is nothing new.

Let's not forget why we are here and what really matters. Nothing has changed; central banks are still engaged in broad-based asset purchases, which increases the money supply tremendously. Close to 25% of all existing USD came into circulation this year, and it's only May. Inflation pressures are building. Ask anyone that buys raw materials; they will reaffirm this truth to you. While this is happening, interest rates aren't moving significantly higher. This means anyone holding cash or bonds at 0% interest, which is 30% of the investable bond market, is losing purchasing power rapidly.

Bitcoin walks on. Producing a new block of transactions every 10 minutes, with zero downtime and zero permission to use.

The Ethereum ecosystem also shows no signs of slowing down. Today we have the ability to exchange, lend, borrow and trade derivatives—all fundamental building blocks of a new decentralised financial system.

Lastly, the classic, "follow what they do, not what they say". Tesla, regardless of Elon's childlike tweetstorms, still owns bitcoin. Skin in-game is all that matters; when he starts shorting it, we can have another conversation, but until then, Elon has done nothing but score an own goal.

It has been fascinating talking to bitcoin sceptics this week, all of whom, like Elon, aren't willing to put their money where their mouth is. One thing stands out for me when engaged in these conversations. All these individuals seem to have a static view of the world; they see the present, not the future. They see the ball but not where the ball is going. This strategy that they choose to take is effectively short human ingenuity.

At Etherbridge, we believe the world can be better, we believe money can be better, and most importantly, we are long human ingenuity.


Notable Articles and News Stories This Week:

Wells Fargo to Offer Crypto Investment to Some Clients

Another week another institution jumping on the crypto train. This week Wells Fargo announced that its wealth and investment management division would soon be rolling out an actively managed crypto strategy. According to Darrell Cronk, president of Wells Fargo Investment Institute, "We think the cryptocurrency space has just kind of hit an evolution and maturation of its development that allows it now to be a viable investable asset". 

Read more here

Australian Minister Says Government Has 'No Issue' With Crypto Investment

The Australian Senator Jane Hume, the minister for financial services and the digital economy, has stated that crypto is "not a fad," adding that they are "an asset class that will grow in importance". She did make sure that investors are aware of the risks saying cryptos are "volatile, high-risk assets". However, she did make it clear that "we take no issue with consumers investing in cryptocurrencies". 

Read about their statements here

Sotheby's 'Natively Digital' Auction to Feature Pak, CryptoPunks NFTs

Sotheby's is hosting a dedicated group auction for NFTs next month. This is the first time that Sotheby's has hosted a dedicated group sale for digitally native crypto art. Major auction houses across the globe have recently dipped their toes into the digital asset market and have been hosting auctions for various digital assets like NFT's. An exciting development for the industry and further shows the potential people are starting to see in these digitally native assets.

Read about the auction here


Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.

If you are interested in staying up to date, please subscribe to our newsletter at etherbridge.co

This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.