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What happened Wednesday? Crypto proved surprisingly resilient

May 21, 2021, 3:31 AM UTC

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It’s often hard to pin down exactly why markets make the gyrations they do. For cryptocurrencies, the prestidigitation of Mr. Market can be particularly mystifying.

Wednesday’s fast and furious crash, followed by a bungee-corded rebound, was a case in point. Bitcoin’s price plunged suddenly by almost 30% to $30,000 on Wednesday morning before rebounding above $40,000 by the next day. At the same time, just about all cryptocurrencies, including Ethereum, Dogecoin, and others, dove more than 20%, though they too have mostly rebounded since.

So, what happened on Whiplash Wednesday? Obviously, people sold a lot of cryptocurrency (before buying it back up). But why?

In the days leading up to the crash, there were signs of weakness showing. Bitcoin’s momentum had been flagging after hitting a $64,000 all-time high last month, signaling bearishness. Tweets from Tesla CEO Elon Musk—a sometime Bitcoin investor and sometime basher—had recently been giving day traders the jitters. And some U.S. investors could have been selling off crypto holdings ahead of tax day.

Then came the major trigger. Reports out of China indicating that a reinvigorated crypto crackdown might be underway set off a panic. The news wasn’t really news though; China has been warning businesses largely against participating in the crypto economy since 2017. As my colleague Clay Chandler observed, given all that policy precedent—and the country’s vested interest in promoting its digital yuan—the latest regulatory, anti-crypto broadside “shouldn’t have come as a surprise.”

Nevertheless, the headlines spooked people enough to spark a sell-off. There’s very little doubt about what contributed to the magnitude and velocity. Many crypto exchanges allow people to take out leveraged “long” positions on Bitcoin and other cryptocurrencies. In some cases, people can over-extend themselves up to tens or even hundreds of times beyond the value of the collateral they post. When that collateral happens to be Bitcoin, it sets the stage for a uniquely precarious situation.

Here’s the anatomy of a leveraged unwinding. As the price of Bitcoin drops, the value of the posted collateral collapses. As that value vaporizes, that causes people’s positions to liquidate. As more Bitcoin gets offloaded into the market, the price drops further. It’s a wealth-devouring feedback loop, a self-reinforcing downward spiral.

Eventually, though, the market finds a bottom. As Bitcoin kissed $30,000, bullish investors bought up their beloved “digital gold” and other cryptocurrencies at what were, in their view, suddenly discounted, bargain prices. The crypto plunge triggered “call” options to kick in, eventually providing enough friction to stop the free-fall. Thus, a snap-back.

One way of reading what happened Wednesday was a wipeout of recklessly over-extended long positions. While some crypto exchanges, such as Coinbase and Binance, buckled during the mayhem, their “decentralized finance” brethren—DeFi projects such as Uniswap, Compound, Maker, and Aave—skated by smoothly. “Yesterday was a tremendous stress test for Ethereum based DeFi and it passed with flying colors,” observed one market watcher.

Sure, some investors were rattled by the chaos. But many of the most promising technologies underpinning the nascent crypto economy—the plumbing of DeFi—handled the wind-down with aplomb. The tech grows stronger by the day.

Robert H. Hackett

@rhhackett

robert.hackett@fortune.com

DECENTRALIZED NEWS

Credits 🚀

Crypto bounces back and finds some stability ... Meme-stocks, like AMC, are back ... Dogecoin is coming to Coinbase ...Decrypt interviewed Dogecoin's lead developer ... Coinbase just launched a Google Chrome extension for its digital wallet ... And the crypto exchange is seeking to raise $1.25 billion in debt ... Ethereum to slash carbon emissions with its "proof of stake" upgrade ... Robinhood is planning an IPO ... And it is now offering stocks at pre-trading IPO prices ... Marqeta files for IPO ... Robinhood rival Trade Republic raises funding at a $5.3 billion valuation ... Ex-SoFi CEO's blockchain startup raised funding at $3.2 billion valuation ... Vodafone partners with Alibaba on VodaPay ... Apple made more than $100 million on Fortnite ... Fidelity offers no-fee brokerage accounts ... Unicorn startup helps banks compete with fintechs

Debits 🐻

Crypto flash crashed on Wednesday ... With Bitcoin kissing $30,000 ... Is the recovery a "dead cat bounce"? ... Are Elon Musk's tweets too influential? ... Does Bitcoin have "no intrinsic value"? ... The IRS sets its sights on crypto traders ... Ransomware "double encryption" is a thing ... So is crypto pump-and-dumping ... Coinbase and Binance suffer outages ... Elon Musk fakers steal $2 million in crypto ... Big Short investor bets against Tesla ... Colonial Pipeline CEO is a $4.4 million ransom-paying patriot ... At least that's not as bad as the $40 million CNA Financial paid ... un-Safemoon? ... Your airline miles are depreciating ... Apple makes big data compromises in China ... Nvidia is trying to limit crypto mining on its chips ... PayPal is holding up payments to Palestinian relief funds ... Biden's Venmo account is public ... WSJ: Crypto is financial "asbestos."

FOMO NO MO

“It’s at 40.7 ETH,” FEWOCiOUS gasped. “That’s crazy.”

It was not quite 4 in the afternoon, and Victor Langlois, an 18-year-old cryptoartist, was at his desktop computer, watching a frenzied bidding war between two art collectors. Langlois — known by his art name FEWOCiOUS, or Fewo, to his friends and fans — was dressed in a white hoodie that he had designed, its arms covered in his own psychedelic art, including an eyeball and sunflower afloat in a blue sky. The room’s window had been covered with cardboard to keep things dark, and a string of blue LED lights shone down from the ceiling. As the numbers rose, Langlois nervously pulled his beanie off and on, running his hands through his poofy black hair.

The bidding war began a day earlier, on Feb. 7, on the auction site SuperRare, when an art collector called @thegreatmando1 offered Langlois 15 ETH for his digital painting “The Sailor.” 

New York Times Magazine published one of the most comprehensive features charting the arrival of non-fungible tokens, or NFTs, as an art world phenomenon. Clive Thompson, the longtime Wired columnist, reports on the rags-to-riches rise of digital artists. He explains the technology that enabled their success, its potential (effectively, the creation of a new economy) and its pitfalls (electricity-wasting computers).

As Thompson writes, "For crypto diehards, these are the early days of a grand shift to an economy in which creators will sell anything digital—music, video-game add-ons, articles, photos—that used to be easily copyable." Gatekeepers, step aside.

BUBBLE-O-METER

$432 million

That's the amount of money cybercriminals netted from cryptocurrency thefts, hacks, and fraud in the first five months of 2021, according to CipherTrace, a blockchain analytics firm. Drilling down deeper into the data: DeFi-related hacks accounted for $156 million, or 60% of that headline total; troublingly, the figure already exceeds the total $129 million stolen in DeFi-related hacks last year. A mere seven breaches—which hit projects such as Paid Network and Yearn.Finance earlier this year—are to blame.

THE LEDGER'S LATEST

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Bitcoin, Ethereum, Dogecoin: Witness the trillion-dollar crypto carnage—and rebound—in 3 charts by Robert Hackett and Lance Lambert

‘China’s Robinhood’ sets its sights on international traders after explosive growth by Yvonne Lau

Why the Bitcoin and Ethereum selloff is actually good for Coinbase by Anne Sraders

Bitcoin must stay above this level for Elon Musk’s bet to be in the black by Shawn Tully

Bitcoin is boring now—which means it’s the perfect time to buy by Bobby Lee

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Largely invisible to the consumer, Europe’s inflation looks very different—but it still has bite by Christiaan Hetzner

What is SafeMoon? Your guide to the cosmic-themed cryptocurrency by Danielle Abril

Elon Musk wants Bitcoin, but not its carbon footprint. Can Bitcoin mining go green? by Eamon Barrett

Can you buy crypto in your 401(k) or IRA? by Ben Carlson

(Some of these stories require a subscription to access. Thank you for supporting our journalism.)

MEMES AND MUMBLES

Not everyone is pleased with Elon Musk's late cryptoforays: Jackson Palmer, one of the original creators of Dogecoin, for example. Though Palmer quit the looking-less-like-a-joke-every-day project years ago—and has mostly since quit Twitter—he popped by just long enough last week to take a swipe at Tesla's "technoking."

Tell us how you really feel, Palmer!

Interested in joining Fortune's The Ledger as a writer? We could use another pair of (diamond) hands. Contact robert.hackett@fortune.com.

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