Three major culprits caused Bitcoin to plummet over the weekend. Is this the beginning of a bear market?

Cailian Press (Shanghai editor Liu Rui) reported that just after Bitcoin broke through $64,000 to set a record high last week, the price plunge of Bitcoin this weekend suddenly poured cold water on the bulls: on Sunday morning Beijing time, the price of Bitcoin fell to $52,148.98, a drop of 19.5% from its historical high a few days ago.

After six months of smooth growth, the price of Bitcoin fell below the 50-day moving average for the first time in six months. Does this technical breakdown mean the beginning of a bear market for Bitcoin? Why did the price of Bitcoin fall? We have sorted out the three major reasons for the decline of Bitcoin.

Reason 1: The suspension of mining operations in Xinjiang caused a sharp drop in Bitcoin hash rate

At about 18:10 on April 10, a major safety accident occurred at Fengyuan Coal Mine in Queergou Town, Hutubi County, Changji Hui Autonomous Prefecture, Xinjiang. After the accident, the Xinjiang Autonomous Region Government required that all coal mines and non-coal mines in the region conduct in-depth safety hazard inspections and rectifications.

As a result, local cryptocurrency mining farms in Xinjiang had to carry out large-scale power outages to cooperate with safety inspections, which resulted in a significant drop in the hash rate of major Chinese Bitcoin mining pools including F2Pool, Poolin, BTC.com, Antpool and Binance Pool, ranging from 10% to 35%.

The hash rate represents the speed at which miners confirm transactions on the blockchain and is an important indicator for measuring the security of the Bitcoin network. The hash rate and Bitcoin price are positively correlated. The higher the hash rate, the higher the network security, which will boost the confidence of Bitcoin investors.

Bitcoin's hash rate has been growing since 2017. However, from 2017 to 2020, the hash rate has dropped significantly three times: a drop of 45.9% in 2018, and a drop of 40.9% and 37.4% at the beginning and middle of 2020. During the same period, the price of Bitcoin plummeted by 76%, 58% and 36%.

According to a Bitcoin mining map released last year by the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge, hash power within China accounts for 65.08% of the global total, while more than half of China’s hash power is located in the Xinjiang region, accounting for 35.76% of the global total.

Luke Sully, CEO of digital asset platform Ledgermatic, said people were “likely selling Bitcoin on news of the blackout in China, rather than on the actual impact of the blackout on the network.” He further added: “The blackout did expose a fundamental weakness: while the Bitcoin network is decentralized, mining activity is not.”

"Bitcoin prices and hash rates have always been correlated." Willy Woo, a cryptocurrency researcher and former Forbes magazine contributor, pointed out that in previous historical situations where a decline in hash rate dragged down Bitcoin prices, once the hash rate gradually returned to normal, Bitcoin prices would also begin to recover.

Reason 2: Negative factors frequently appear at the regulatory level

There was also some negative news on the government regulatory front.

First, there are foreign media reports that the US Treasury Department is planning to crack down on financial institutions that launder money through digital assets.

Secondly, Li Bo, deputy governor of the People's Bank of China, said at the "Digital Payment and Digital Currency" sub-forum of the Boao Forum for Asia 2021 Annual Meeting that if crypto assets are to become a widely used payment solution, stronger regulatory rules are needed, that is, stricter than the current regulation of Bitcoin.

Third, Turkey will also ban the use of digital currency for payment on April 30. Turkey recently announced a ban on cryptocurrency as a means of payment. The ban does not prohibit the purchase of Bitcoin, but there may be obstacles to depositing funds through the country's banks.

In addition, yesterday, foreign media reposted on Twitter the news that India may be preparing to ban cryptocurrencies in the country. Although this news is actually "old news" from a month ago, the reposting of it by foreign media may stimulate market sentiment to further ferment.

Reason 3: Coinbase executives sold

Last week, the news of the listing of Coinbase, the "first cryptocurrency trading platform", once pushed Bitcoin to a record high. Since Coinbase adopted the direct listing route, there is no lock-up period for the stock. On the first day of listing, Coinbase CEO Brian Armstrong sold $291.8 million worth of stock. The company's CFO sold more than $99 million worth of stock.

According to documents on Coinbase’s investor relations website, as of last Friday, company insiders had sold a total of approximately 12,965,100 shares. Based on Friday’s closing price of $344.38, the total value of the company’s shares sold by insiders was close to $4.5 billion.

Although it is not uncommon for directly listed stocks to be quickly cashed out by insiders after listing, this also indirectly shows that Coinbase executives may believe that the current company's stock price and Bitcoin price have reached a stage high.

How will Bitcoin perform in the future?

After the weekend's sharp drop, Bitcoin fell below its 50-day moving average for the first time in six months. One analyst said that while the decline looks like a typical bull market correction, the decline could extend further if the price confirms a consecutive break below the 50-day moving average.

“It’s just a brief loss of (bullish) momentum at this point, but we think a couple of consecutive closes below the 50-day moving average would be enough to get us off the sidelines,” said Katie Stockton, technical analyst and managing partner at Fairlead Strategies.

But she also said that even after the weekend's big drop, Bitcoin's year-to-date gains are more than 90%, which means that it is more likely to rise further than fall.

“We view this pullback as counter-trend rather than the start of a bearish reversal as it comes after a confirmed breakout to new highs,” he said, adding that even if the price of Bitcoin falls further below its 50-day moving average, Bitcoin could still rally to $69,000.