What Happened to the Cryptocurrency Market on Black Friday?

bitcoin, btc, cryptocurrency-1813503.jpg

On a Friday that surely won’t be forgotten anytime soon, on January 21st, 2022, according to CoinMarketCap, cryptocurrencies lost $205 billion in combined market capitalization. Bitcoin was trading at $38,440 as of 10AM Eastern Time on the day many are already calling “Black Friday”. This represents a 16.6% year-to-date drop for the most widely recognized cryptocurrency (Morris, Fortune). Furthermore, Bitcoin has already successfully erased 75% of their gains from 2021 and we’re less than a month into 2022.

Additional noteworthy cryptocurrencies that suffered substantial setbacks were Ethereum, Solana, and Cardano. Ethereum is especially relevant here, as they received a monumental endorsement from Goldman Sachs in mid-2021. It plummeted 13.5% on Black Friday (-24% YTD), while Solana crashed 16% the same day (-30% YTD), and Cardano dropped 15% (Morris, Fortune). Cardano is also unique since their early gains make their current -8.5% YTD slip seem almost unscathed by comparison.

Fortune

Dodgecoin and Shiba Inu, classified as “meme coins”, weren’t exempt from the carnage either, falling 10% and 13%, respectively (Shrivastava, Yahoo Finance). According to CoinMarketCap, judging by overall market cap, they are by far the two largest meme coins. With that, let’s dig into the question investors around the world are actively pondering; what happened?

Russia’s Central Bank Proposed a Cryptocurrency Ban

Let’s start with the most obvious. On Black Friday, Reuters reported Russia, one of the world’s largest economies the third-largest Bitcoin miner in the world, proposed banning the use and mining of cryptocurrencies via their central bank. This is eerily similar to a move China pulled at the end of May 2021. We similarly witnessed Bitcoin and other major crypto’s suffer short-term dips, while quickly rebounding in the immediate weeks that followed.

Russia’s central bank argued cryptocurrencies pose a substantial threat to the country’s financial stability. Additionally, they highlighted reasons pertaining to citizens’ wellbeing and its monetary policy sovereignty (Reuters). Ultimately, Russia’s central bank didn’t mince words, concluding with:

“The best solution is to introduce a ban on cryptocurrency mining in Russia”

-The Central Bank of Russian Federation (CBR)

What’s lacking coverage right now is Russia has been arguing against cryptocurrency adoption for years. Russia’s been extremely vocal in raising concerns about the ease of cryptocurrency markets being used for money laundering and even financing global terrorism. It wasn’t until 2020 that they were given legal status, despite still being banned as a means of payment.

Specific to events that unfolded on Black Friday, Russia’s central bank focused heavily on the long-term stability of cryptocurrencies. To be blunt, it tore them apart. The central bank determined their rapid growth was reflective of potentially perilous instability. Essentially, the central bank issued stern warnings of the cryptocurrency market being one enormous bubble. They went so far as to indicate cryptocurrencies carried similar characteristics to a financial pyramid.

Large Market Liquidations Led by Bitcoin

As one would expect, Black Friday was one of the highest ever single-day cryptocurrency liquidations. The significance of losing a combined $205 billion in market capitalization over a 24-hour period cannot be underscored. Leading that effort was Bitcoin, with Ethereum not far behind. The two lost over $281 billion and $207 billion in 24 hours, respectively.

The below chart, derived from CoinGlass Liquidation Data, does an excellent job in illustrating how Bitcoin’s price is impacted by investors taking a short position on crypto’s. As investors begin to show skepticism, it appears Bitcoin (BTC) begins to snowball downwards at an increasing rate.

CoinGlass

As the largest and most well-known cryptocurrency, historically Bitcoin’s performance dictates the overall crypto market trend. The same proved to be true on Black Friday.

CoinGlass/Yahoo Finance

Wall Street’s Weak Overall Weekly Performance

Looking to recent history again, the US stock market performance has had a direct relationship with the crypto market’s performance. Before Black Friday, the S&P 500 Index (SPX) dropped nearly 4% over the course of 72 hours (Shrivastava, Yahoo Finance). When this was covered in real-time by Yahoo Finance, MacroAxis’ model had a maximum correlation of 0.59 between BTC and SPX. This is considered a significant correlation. The macroeconomic models from MacroAxis now show an existing correlation as high as 0.64, a stunning daily increase.

While Russia’s central bank is undeniably the primary catalyst, Bitcoin’s rapid liquidation created an expected snowball effect. That made for terrible timing for historically safe, reliable US stock market investments to have a noticeably subpar week. Many investors, who were already feeling the pressure of safer investments in their portfolio losing value, were put in an even more precarious situation with their more speculative investments nosediving, causing many to quickly liquidate before further damage was done.

Unsurprisingly, what’s next for Bitcoin and the cryptocurrency market is continuing to be widely debated. Multiple highly credible analysts and institutions remain firmly bullish, claiming Bitcoin will surpass $100,000. While a very wide network of high-net-worth individuals and financial giants still backing Bitcoin and crypto’s exists, it’s hard to imagine we won’t see another rebound yet again.