Lessons Learned from the March 12 Crypto Crash
Black Thursday revealed the Bitcoin is not correlated with Wall Street or Gold.
Today is March 12 2021, a year from when Bitcoin crashed to insane under-$4K lows. Will we see another crash the likes of Black Thursday? Let’s look at the factors that brought that about.
COVID, Wall Street and FUD all Played a Part
What happened on March 12–13 2020 was preempted by the March 9 stock market crash in traditional markets. Amidst an atmosphere of fear and uncertainty caused by COVID-19 and the ensuing global lockdowns, the Dow Jones Industrial Average plunged on March 9, 12 and 16 with some of the worst point drops in US history.
That same FUD was fueling the crypto space as crypto traders feared market correlation with Wall Street. So on March 12, when the BTC price dropped to a low of USD 3,600 on BitMEX, which then closed for “maintenance” due to a “planned DDoS attack”, all the ingredients were ripe for havoc.
Traders panicked on the other exchanges, which led to technical problems. Binance, Huobi, OKEx and other exchanges all reported downtimes due to excessive traffic, which only upped the FUD levels.
As Bitcoin, the barometer of all the other cryptos, suffered its second worst drop (worst drop being March 2018), other leading altcoins such as ETH, XRP and LTC experienced double digit falls.
Black Thursday revealed the fragility of the token economy again, the first time being the early 2018 start of the 2-year crypto winter. However, for Black Thursday, things were a bit different from the first big crash, as I will explain below.
Black Thursday Revealed BTC Not Correlated with Gold and Wall Street
In 2018, a lot of scammy projects and tokens infested the crypto space. The 2-year crypto winter cleaned that up quite a bit.
In 2020, Black Thursday, while revealing the still fragile state of the token economy, also revealed something else. That the crypto markets were not correlated with Wall Street nor with Gold. In July 2020, Bitcoin’s correlation with Gold turned negative, while over the 12 months, Bitcoin markets and those of the S&P 500 and Nasdaq have increasingly diverged in price behavior.
This was a significant revelation in many ways.
Traditional markets and crypto markets both experienced extreme FUD during that week in March but what followed after the initial panic dissipated is telling. Crypto markets recovered very quickly, hitting highs in trading volumes as the volatility caused by COVID-19 actually encouraged more people to trade and within a month many cryptocurrencies had regained pre-March 12 prices.
In fact the pandemic has acted as a litmus test of sorts for BTC as a currency. Built on a decentralized public blockchain, Bitcoin offered a digital store and transfer of value that was theoretically impervious to manipulation by central banks and global financial institutions. The more dire the economic circumstances, the more trust in a token economy running abstractly on lines of code, this was the prevalent sentiment.
On the other hand, Wall Street had to depend on the Feds to bounce back. A slew of QE measures and backing loans to keep businesses afloat were implemented to reassure investors. Massive stimulus packages, COVID vaccines and unemployment benefits were all employed to support the market rebound, even as overall, the actual economy was languishing.
This kind of disconnect with real world economics is what is so worrying about Wall Street. And precisely the reason decentralization is needed now more than ever.
Where will Bitcoin/crypto markets be a year from now?
If the pandemic and the accompanying restrictions keep up, then I would say it is the perfect backdrop against which the mass adoption of decentralized, P2P and borderless payment systems can happen.
Remote work and travel bans have zero impact on crypto transactions which can be sent and received in the safety of people’s homes. Gold faces challenges from supply chain disruptions and logistics in times like these. Again, not an issue for cryptos that exist in borderless cyber space.
Institutional interest has been increasing as the value of BTC is becoming more and more recognized in financial investment circles. This will continue despite a tightening of KYC/AML regulations.
Regulations and a Focus on Quality will Take Centerstage
Regulations will be playing a prominent role in this burgeoning space as the authorities continue their attempts at control. We can expect more lawsuits, more regulations, more delistings on exchanges. But will it matter in the end? I tend to think what doesn’t kill us will instead make us stronger.
The emphasis will be on quality — quality projects and tokens will stay and thrive. Bad actors in the space should clean up their acts or exit the scene totally because they are a hindrance to mass adoption.