Behind this Bitcoin price correction

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The price of bitcoin rose last week, but this decision did not come out of nowhere. While some people attributed the price spike to the fake news that Amazon was considering accepting bitcoin, the charts were signaling that a move was ahead, approaching a watershed for weeks.

I attribute this mid-cycle correction to three dominant and concurrent narratives that, before being resolved, caused major uncertainty and price drops. These events affected sentiment across all segments of the bitcoin market – miners and retailers, developers and high net worth individuals. Any of these narratives alone could have caused a drop, but the three together combined to drive prices down significantly.

A new Chinese ban on mining

The drop in mining hash rate resulting from China’s ban on mining (highlighted in red above) has rocked the mining industry. Miners were hit hard, already facing a global chip shortage, and then this news was added to their plate. Retailers and traders were also affected by this development, bombarded with negative headlines for weeks.

The hash rate (the cumulative computer speed at which miners search for the next block) peaked just before the ban on May 9. I guess that’s when miners in China started hearing rumors about what was to come. The Chinese Communist Party’s official public statement banning mining came on May 21. Over the next four weeks, the hash rate continued to drop, dropping from a total of 190 exahashs per second (Eh / s) to 58 Eh / s at the bottom.

This was undoubtedly a major concern for many casual investors. Would the network be able to cope with such a fundamental blow? Those deep in the weeds of Bitcoin, however, were much less worried about this situation. Bitcoin is adaptable. The blocks were found a bit slower, but kept moving forward. The difficulty adjusted a few times as expected, and the network itself suffered no lasting damage. The hash rate plunge finally rebounded on June 27 and as of this writing it is up 98% from the lows.

The recovery will be slow but steady as Chinese mining equipment is moved or sold, ending in more friendly and distributed jurisdictions and resulting in a more robust mining industry. Investor uncertainty quickly subsided as the hash rate rebound continued into July. Today, the network is stable and strong.

Unlocking Grayscale Trust Records

The second major cause of uncertainty during this time was the Grayscale Bitcoin Trust (GBTC) release schedule (highlighted in gray above). This narrative affected sentiment among high net worth investors and professional trading firms in the space. The whales believed quite strongly that their peers would benefit from arbitrage trades immediately after the unlock periods.

Source

A quick 101 on the GBTC: GBTC is a closed-end trust, where investors can gain exposure to the trust’s underlying asset, bitcoin, without personally owning bitcoin, similar to an exchange-traded fund ( AND F). Accredited investors can buy new shares directly from Grayscale at the price of the net asset value (NAV) (the equivalent of the spot price), increasing the supply of shares outstanding, then after a lock-in period six months, can sell the shares in the secondary market to investors of all types. Buying new Grayscale shares requires Grayscale to go into the market and buy bitcoin, which drives up prices.

There is also a feedback loop aspect. As the price of bitcoin rises, this results in more demand in the secondary market and a higher premium, then more demand for new GBTC shares and more cash purchases by Grayscale. It pays well as long as the secondary market premium lasts. For example, if the premium is 20%, investors can buy a GBTC share at net asset value and then, six months later, sell it back at a gain of 20%. (It’s a little more complicated than that, but that’s the basic idea.)

For GBTC’s short lifespan, it had always been given a premium, but in the week of February 23, the secondary market price slid to a haircut, which means the secondary market price has passed. below the net asset value. This effectively cut the feedback loop and the demand from accredited investors to buy new stocks abruptly stopped, hence the halt to buying grayscale bitcoin.

Long story short, market participants were tracking six-month blocking periods for blocks of shares. Some analysts were expecting a sharp drop in prices to coincide with the last and largest release on July 17. It was not uncommon to hear price predictions between $ 20,000 and $ 20,000. When the decline did not materialize, the uncertainty around the GBTC disappeared.

The GBTC discount has dropped from 15% to just 6% today, and is fast approaching parity.

Bitcoin taproot upgrade

The third story for bitcoin was the Taproot upgrade (highlighted in orange above). This narrative has affected developers and HODLers in the long run. They are well aware of the recent history of Bitcoin upgrades getting dirty and rightly worried that this upgrade could lead to a similar split. After all, Taproot is the first soft fork for Bitcoin since the much contested upgrade from SegWit in 2017. In general, there was a lot less drama surrounding this upgrade from the start, people still weren’t sure how. it would take place.

Bitcoin upgrades are slow and meticulous things, as it takes years to go through the process in a decentralized and trustless manner. No individual or group is responsible for telling people to level up. The hardest part is just getting everyone to agree.

The nature of Bitcoin upgrades as soft forks makes this process a bit easier. A soft fork is a change backward compatible with previous versions, it does not activate new behavior that would break old, un-upgraded nodes. (A lot of nuance is missing in this statement, but that’s the general idea.) The coordination techniques used by more centralized altcoins are not possible in Bitcoin, so it becomes a long and uncertain process of open and public debate. .

Despite all this, a loose compromise was reached and on May 1 two activation mechanisms were released, one called Speedy Trial, the other a simple activation date in the future. If Speedy Trial managed to reach a critical level of support by August 11, the two mechanics would merge into one. Otherwise, the main Bitcoin app would have to come back to the drawing board, which could lead to a network split.

The community didn’t have to wait long, Speedy Trial was a huge success, locking down activation very quickly on June 12th. The whole process turned out to be relatively painless and seamless, but it was the result of years of back and forth. discussion, planning and compromise. The taproot will fully activate in November.

This upgrade went a bit under the radar this summer, but when it was locked down, many die-hard Bitcoiners, people deeply involved in space, heaved a big sigh of relief. There would be no community split like in 2017.

The rest of 2021

These three major narratives have mostly come full circle, but there are still a few minor issues that persist. A few relatively insignificant GBTC unlocks are slated for the rest of July and through August. The miners have not completed their recovery, but are on the right track. I expect, by the end of the year, that the hashrate will return to its full power and to record computational speed. The taproot is locked but not activated. This only happens in November. A few well-respected cypherpunks in space are still concerned, but these are nuanced arguments that are not shared by everyone.

What’s exciting is what’s happening now. If and when the price of GBTC returns to a premium, this will provide a strong incentive for investors to buy new GBTCs from Grayscale, forcing Grayscale to buy bitcoin on the open market. Therefore, the effect of GBTC on prices for the remainder of the year is likely to be positive.

Miners will be less beholden to a fickle authoritarian state like China. Maybe this leads to cost savings if in a friendlier jurisdiction that has less corruption, leading to more hoarding or increased hash rate.

Finally, Taproot enables many powerful new features in the Bitcoin protocol. It will open up many new opportunities for financial services and businesses of all types.

The second half of this bull market will be intense.

For more content like this, Ansel Lindner writes a weekly newsletter at BitcoinAndMarkets.com.

This is a guest article by Ansel Lindner. The opinions expressed are entirely theirs and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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