On the Chaos of Bitcoin

VeradiVerdict — Issue #44


  • Bitcoin was on fire this past week, and peaked at $14,000 on 6/26, the highest it has been since January 2018. That reflects a 200+% increase since the beginning of the year.

  • It’s hard to pinpoint the exact reasoning for BTC’s price increase, but some theories I have are:

    • Halving: The reward for miners is computationally set to halve in 2020, which artificially drives up the value of BTC. Anticipation for the halving event might be driving some of the recent price increases.

    • Tether: The sales of a stablecoin called Tether in bulk amounts might drive some punctuated, large-scale changes in the demand for and price of BTC.

    • Market Manipulation: Much of the recent BTC activity has been occurring in large quantities over small intervals of time, suggesting that consumers are teaming up to force the market in a specific direction.

    • Institutional Confidence: Large financial institutions like JP Morgan and DRW have been gaining renewed interest in cryptocurrency as an uncorrelated asset class, which leads to bulk changes in quantities of cryptocurrency bought/sold and also signals confidence to smaller investors.

    • Facebook and Libra: Facebook announced its own cryptocurrency, Libra, this past week, which undoubtedly increased confidence and interest in cryptocurrency as a valid financial vehicle.

    • US-China Trade War: The ongoing trade war has produced dismal results for stocks and more traditional commodities; investors might be turning to BTC and cryptocurrency to hedge some of the losses from the trade war. Public interest in BTC in the US and China are both also at highs, reflecting interest from both sides.

    • It’s unclear how long this bull run will continue or what the exact outcome will be, but if there’s one thing for sure, it’s that Bitcoin and cryptocurrency are receiving levels of public interest and confidence that it has never seen before.

What’s all the fuss about?

If you’ve been following cryptocurrency at all recently, you have probably noticed the community going crazy over insane fluctuations in the price of Bitcoin over the past week. BTC started the week at roughly $10,000, but peaked at an insane $14,000 on June 26th, the highest it has been since January 2018. Just six months ago, Bitcoin was at $3,600, a ridiculous comparison to its current levels.

Cryptocurrency is widely known for its crazy price variations, but it has rarely ever been at this scale; a $4,000 rise within a week is meteoric, even for Bitcoin, and even more confounded by the fact that BTC fell 19% the next day. Part of this is due to a temporary outage by prominent cryptocurrency exchange Coinbase, but that issue was resolved in minutes; even following the outage, BTC’s price continued to fluctuate quite a bit and currently hovers around $12,000.

Bitcoin, and cryptocurrency broadly, is gaining some serious national attention in recent months and price fluctuations like this largely threaten consumer and investor confidence in cryptocurrency and electronic commodities and assets. Spikes and falls like this are highly reminiscent of the crypto bubble burst at the end of 2017. Understanding why fluctuations like this happen are critical to making informed decisions in the cryptocurrency space.

So, why is Bitcoin going crazy?

Good question. The short answer is that it’s really unclear. As with any financial market, there’s a ton of speculation for why prices change so quickly but it’s hard to tie any quantitative change in the value of a commodity to any one change in the real world.

The longer answer is that the financial and cryptocurrency world have seen a lot of action in the past month, especially in the past few days. I’ve compiled a list of some things I think might be part of the vehicle for Bitcoin’s insanity and broke them down below.


Quick refresher on Bitcoin: when Satoshi Nakamoto proposed the system in early 2009, he architected the system to max out at 21 million BTC over the course of Bitcoin’s lifestyle. But if you look at the underlying code for Bitcoin, there’s no line that says “stop producing at 21 million BTC.” Rather, when miners create and validate a new block, they receive BTC in compensation. Miners initially received 50 BTC; this was later halved to 25 BTC, then 12.5 BTC, etc. Essentially, this is a way for the system to exponentially slow the production of BTC to ensure that it doesn’t exceed its 21 million cap.

In 2020, Bitcoin’s miner reward will halve to 6.25 BTC per new block. This drives up the value of BTC because (1) miners receive less rewards for creating new blocks, and thus, less new blocks will be created, slowing the production of BTC, and (2) the supply of BTC is artificially becoming smaller, raising the value of each coin.

The last time Bitcoin was halved in December 2017, BTC’s price shot up to $20,089. Halving events in general produce spikes in the price of BTC, and the next event (projected in May 2020), will undoubtedly do the same. Though we’re a ways off from the halving date, people are gearing up in anticipation and the price of BTC might be on the rise for that reason; speculation around the impact of the next halving, combined with the myriad of other factors listed below, might just be one factor behind the recent spikes and falls in the price of BTC.


Other cryptocurrencies are highly correlated with the price of BTC too, and have major effects on the perceived value of the cryptocurrency market broadly. Tether, a stablecoin pegged to the US Dollar, has been receiving a ton of attention recently; in the past month alone, $600 million worth of Tethers have been minted.

Tether’s architecture is what makes the possible ties between its own growth and BTC’s explosion particularly interesting. Tether’s growth isn’t gradual, but rather punctuated; institutional investors have to give at minimum $100,000 to purchase directly from Tethers, which leads to weekly growth on the scale of $100 million. Essentially, Tether grows in aggregated batches rather than dollar by dollar.

Once Tether mints its coins, it sells it on the public market in batches, which consumers purchase and then use to buy Bitcoin or other cryptocurrencies. Because Tether is available and sold in batches, it generally leads to huge spikes in consumption of cryptocurrency when it becomes available. For instance, some of the more recent batches of Tether sold coincided with BTC’s parabolic increase from $8,500 to 10,000 in late May/early June. Essentially, when Tether releases its batches for sale, consumers buy a ton of Tether and then use that to buy a ton of BTC, driving up its value.

Tether likely isn’t the only cryptocurrency playing a role in BTC’s bull run, but it’s definitely one of the larger factors given the scale at which it impacts the cryptocurrency market.

Market Manipulation

Many critics of Tether suggest that Tether highly colludes with its traders; rather, affiliates like Bitfinex issue Tether to traders who can then manipulate the cryptocurrency market with their new aggregation of assets, and then pay for the Tethers later when they profit from market moves.

Tether’s specific role in market manipulation is up for debate, but the existence of large coalitions that band together to force profitable market trends isn’t. Bitcoin and cryptocurrency are architected as a system that operates on the consensus of a mass of users; if a substantial mass of those users gets together, they can move the market in the ways they desire and generate significant profits.

Temporal analysis of market activity on June 26 (the day of BTC’s massive spike) shows some surprising trends that might correspond the manipulation hypothesis. $7 million worth of BTC was sold within 5 minutes on Bitstamp, and then liquidated within 1 ms on Binance. Seeing financial activity of that scale in such a short time delta is highly unusual, unless it was planned. Multiple anonymous messaging channels, on the scale of tens of thousands of users, asked users to band together to manipulate the market on Bitmex, hours before these transactions happened. It’s not certain that these events are tied and the idea might seem far-fetched, but the logic makes sense; people might be banding together to artificially force BTC’s insane bull run.

Institutional Confidence

Following the crash of Bitcoin in late 2017, a lot of financial institutions expressed doubts about the potential of cryptocurrency as a legitimate financial asset; many Goldman Sachs and JP Morgan executives were quoted delegitimizing Bitcoin as any matter of substance, but rather a financial fad.

Recently though, Bitcoin and cryptocurrency has been getting a lot of interest from the general public; on top of that, prices have been steadily rising. This has given institutions reason to think twice about their initial perceptions of cryptocurrency. Tons of companies, including Jump Trading, DRW, Galaxy Digital, Fidelity Investments, the NYSE, and Morgan Stanley, have given cryptocurrency renewed attention, even considering the possibility that it might constitute a legitimate, uncorrelated asset class.

Institutional investors are even using it to hedge risk; while the DOW Jones falls, BTC’s prices steadily increase––leading many investors (namely, Fidelity Investments) to announce plans to sell cryptocurrency on their platforms to manage some of the more traditional financial risks.

It’s hard to quantify the impact of large financial institutions on BTC’s price, but their effect cannot be understated. Institutional investors are important because (1) they consume cryptocurrency in bulk amounts [institutional activity is up 300%], which in and of itself has the potential to drive huge changes, and (2) a lot of smaller investors gain confidence and intuition from the movement and forecasting of larger institutions, so their attitudes towards cryptocurrency are reflected throughout the broader investing community.

Facebook and Libra

Anyone who has been following the cryptocurrency world knows that the price of Bitcoin is going crazy, but also that Facebook has launched its own cryptocurrency, Libra, regulated by a foundation that has massive partners like MasterCard, PayPal, and Andreesen Horowitz. You can read more about Libra here.

Though Libra hasn’t officially debuted for use on any cryptocurrency market, its symbolic impact is sweeping. Having an institution with the user base on the scale of Facebook announce a cryptocurrency creates huge confidence in cryptocurrency broadly; it legitimizes it the same way that positive forecasts from banks like Goldman Sachs or JP Morgan do. Moreover, Facebook’s integration with its own new wallet tool Calibra, means that cryptocurrency will be more natively accessible than ever before, fostering even more confidence in the growth and versatility of cryptocurrency.

Facebook’s announcement has been top-of-the-line for most news networks this past week, reflecting immense public interest and possible confidence in cryptocurrency. With higher confidence comes higher prices. People have more faith in the potential of cryptocurrencies and Bitcoin to constitute legitimate financial vehicles and tools. And it’s unlikely that BTC’s parabolic rise just coincidentally corresponded with Facebook’s announcement. The massive public interest creates tangible rises in the price of BTC.

China and US Tensions

The ongoing trade war between the US and China has massive implications for traditional financial assets. For instance, on Monday of last week, China announced that it would raise tariffs on $60 billion of US imports; the same day, the Dow Jones industrial average fell a shattering 696 points. Chinese stocks and commodities were down the same day too; the Chinese Yuan reached a four-month low this past week.

Despite these trade battles, the price of BTC has steadily risen. This means that cryptocurrency presents a mechanism for investors to diversify their portfolios and avoid the price crashes of stocks induced by an ongoing trade war with China with an indefinite end.

The decline in stocks happened the same week as the spike in the price of BTC; lower stock prices might result in renewed public interest in the better-performing class of cryptocurrencies, which drives up the price of BTC. Google search trends and Baidu search trends for cryptocurrency and bitcoin are also at relative highs; Baidu’s increases are even larger, which means that China’s perceived interest in cryptocurrency is increasing even more than the US’s. Search trends and public interest are highly correlated with the value of BTC, so it’s no surprise that the price of BTC has shot up so much this week.

Final Thoughts

There are a million other things that might contribute to Bitcoin’s insanity on top of the six mentioned here; unfortunately, there’s no concrete way to tie tangible price increases to any real-world events. But I have relative confidence that some combination of halving, other cryptocurrencies, market manipulation, institutional confidence, Facebook’s announcement, and the US-China trade war is driving the BTC bull run to some degree.

BTC’s increase is important because it reflects massive public interest in the cryptocurrency; even cryptocurrency non-enthusiasts are aware of the phenomenon, because any financial trend of this scale is sure to top the headlines of every major news organization. Whether the bull run reflects a sustainable increase in the value of BTC or is indicative of a crash is hard to determine. But given the hypothesized reasons for the bull run, I can say with confidence that public interest in Bitcoin is indubitably going up––and that has huge implications for the cryptocurrency community at large.

- Paul


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Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing into blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early investments and want to share my thoughts and what’s going on in the industry in this weekly newsletter.

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