Anton Gulin, Country Manager at AAX Russia and CIS, in his column on RBC-Crypto about the main events of the beginning of 2021 and how to reduce risks when entering the digital currency market.
At the beginning of 2021, shares of GameStop surged by almost 2500%, peaking at $483. The next few days saw an equally steep dump by 84%. Even cryptocurrencies, which are often cited as one of the most volatile assets, rarely show such fluctuations and volatility.
The growth of GameStop shares is associated with the users of the WallStreetBets thread of the popular Reddit, who stand together in the “fight against hedge funds. Large investment firms were actively shorting, including the shares of GameStop, a video game store. It’s a traditional retail company: physical stores sell movies, games and other merchandise. As the market became more online, the retailer’s sales fell along with its stock nearly 90% from 2015 to 2020. The company was one of the leaders in the number of traded shorts.
As a result, all the “short” positions became fuel for an extreme surge. Buyers of securities, the number of which grew sharply in a short period of time, managed to achieve short squeeze. This is the situation when short holders are forced to close their positions and buy back securities in order to return them to the broker. It sharply increases the number of purchases and leads to lift off of the asset’s quotations.
Many hedge funds playing short have suffered serious losses as a result of the actions of Reddit traders. For example, Citron Capital closed most of its short positions in GameStop with losses of 100%. Melvin Capital was hit even harder, losing $3.75 billion or almost 30% of the funds under its management since the beginning of the year.
Stabilization measures
In order to curb the uncontrolled rise in the GameStop’s and other companies’ share prices, the U.S. authorities, in particular the National Securities Clearing Corporation (NSCC) which is managed by the SEC, began to apply emergency measures.
On January 27, the financial regulator sent a letter to Robinhood, a popular stock and cryptocurrency trading app, demanding a $3 billion deposit, with only $2 billion raised from venture capitalists. The figure was later lowered to $1.4 billion, but also remained very significant for the broker. After Robinhood decided to turn off the ability to open “long” positions on shares of GameStop and some other companies, the deposit of NSCC was reduced to $700 million. It is these costs that the head of the company Vladimir Tenyev explained the decision to suspend the possibility of buying shares. He stressed that the company had no choice.
As a result, the share price began to fall. In addition to the shares of GameStop, which surged by more than 80%, other assets “hyped” by Reddit traders also plummeted. For example, the share price of AMC Entertainment Holdings has fallen from its peak by 74%, quotes for BlackBerry securities decreased by almost 65% for a few days.
Reddit traders and the cryptocurrency market
On February 1, the Ripple token reached a two-month high of $0.755, amid activity by retail traders who had previously succeeded in inflating the price of GameStop shares and other assets. At the end of January, a chat room was created in the Telegram messenger called “Buy and Hold XRP on February 1,” which had a maximum number of 200,000 participants (the limit is reached within the messenger’s limits). There was also a group with a similar topic, which had more than 90,000 subscribers.
However, at the appointed time (16:30 Moscow time), instead of further growth of the token price there was a “dump” – asset collapsed by 47%, and the liquidation of margin positions led to losses of traders amounting to $508 million. There were speculations that the wave of growth of the asset value, which occurred before the sharp fall, was created for mass purchases, with which large holders exited the asset.
Traders from Reddit may be involved in the surge in Dogecoin cryptocurrency prices. This happened after a Twitter user under the nickname WSB Chairman asked his 386,000 followers which of them hold bitcoin. Users began discussing the cryptocurrency, naming different altcoins. WSB Chairman then wrote that Dogecoin was the most talked about, after which its rate began to skyrocket. In a few days, it increased by almost 1000%.
In addition to Reddit users, Tesla and SpaceX CEO Elon Musk began influencing the cryptocurrency market in 2021. He actively publishes various messages about Dogecoin on his Twitter account, which also leads to sharp price spikes. The billionaire has also written about bitcoin. On January 29, Musk tweeted a post about the first cryptocurrency and placed its hashtag in his account profile, the asset went off, rising 15% in half an hour.
Institutional investors coming in
Cryptocurrencies have attracted the attention not only of retail investors, but also big players. In early February, payment giant Visa announced the release of its own system (API) for the purchase of digital money, which will be integrated by banks. The launch of the product may take place at the end of this year, and the first user of the service will be a digital bank First Boulevard.
Anchorage Bank, which was the first in the U.S. to be licensed as a national cryptocurrency bank, will store bitcoin and other digital money for the benefit of Visa customers. It is assumed that they will be able to withdraw the cryptocurrency to external wallets as well, which will be one of the service’s advantages over PayPal, which has restrictions on withdrawals.
In 2020, cryptocurrencies finally came out of the shadows and became a full-fledged financial instrument. This happened as large companies began to buy up thousands of bitcoins. For example, MicroStrategy bought over 71 thousand BTC and already has a profit of almost $1.6 billion, according to Bitcoin Treasuries. Also, in the fall, Square, the company of Twitter creator Jack Dorsey, invested in the cryptocurrency. By the current moment, the amount of its investments has grown more than three times, up to $185 million.
Many analysts believe that bitcoin remains an extremely undervalued asset at current price levels. For example, the investment director of the company Guggenheim Partners Scott Minerd believes that in the long term, the quotes of the first cryptocurrency may reach $400-600 thousand. Minerd explained that earlier the asset was not interesting for investors of institutional level because of low capitalization, but the situation has changed when its rate exceeded $10 thousand.
Following the institutional players, AAX notes a sharp increase in interest in cryptocurrencies among users who were not previously interested in crypto-assets. This phenomenon has been observed in Russia and the CIS, which are the dominant regions in terms of market share in AAX. The post-Soviet countries accounted for 61% of total trading volume in November 2020. And in January 2021, growth in registrations and deposits was up 310% over December 2020. Particularly strong user interest was recorded in perpetual futures with mutual settlement in BTC.
How to choose the right moment to buy bitcoin
To enter the market correctly, the experts and analysts of AAX recommend to buy the asset in parts, and not to try to catch the dip, but to average the entry price. In this case, price drawdowns can be an excellent opportunity for a more profitable purchase.
It is impossible to reliably predict the movement of cryptocurrency prices. At the same time, if you don’t enter with the entire amount at once, there will be an opportunity to buy more later on. Even if the asset will rise in price over time and the entry point will increase, the investor will protect himself from a possible loss of capital. Profits from the first purchases at a lower price will compensate for possible losses on subsequent transactions.
Many investment funds now predict a multiple growth of bitcoin in the future. For example, in addition to Guggenheim Partners, which expected the rise in price of the cryptocurrency to $ 600 thousand, such an opinion was expressed by analysts at ARK Invest. They explained that with a different percentage of the first cryptocurrency in the portfolios of institutional investors, its price can vary from $100k to $500k.
Brett Messing, chief operating officer at Skybridge Capital, an investment firm with $7 billion in assets under management, noted that bitcoin would rise to $500k if the cryptocurrency market experienced a massive influx of capital from institutional-level investors. Messing stressed that the cryptocurrency will not achieve this goal if it remains a niche product.
According to the expert forecast bitcoin will go up in price to $100 thousand in the next 15-16 months, the next target will be the level of $150 thousand. If it is passed, then the quotes of the first cryptocurrency will easily reach the level of $500 thousand, Messing confident.
Analysts at AAX suggest that if Bitcoin maintains a parabolic momentum, it is quite possible it will reach $55 thousand in the first quarter of 2021.
According to our own analysis, Bitcoin’s bottom is situated around $35 thousand. As the price continues to rally and ‘older Bitcoin’ is sold to new investors in Bitcoin, this bottom rises along with it – with new price horizons. The bull run can be expected to continue until at least the end of November 2021, and while corrections can be expected, there is little reason to believe that we will a severe bear market. Especially considering the macro environment.
Institutional investor support not only has a positive effect on the quotes and reduces their volatility, but also protects against external factors. For example, the higher capitalization of the asset, the harder it is to manipulate its value. Therefore, due to the inflow of a large number of new funds, cryptocurrency becomes less susceptible to all kinds of manipulations.
