The cryptocurrency marketplace crashed for the first time in May 2021, causing the price of bitcoin to plummet by more than 40% from its April high of $65,000. Since then, Bitcoin’s price has been dropping, making industry professionals very anxious and popping one thought in every investor’s mind, “Will the crypto market recover from this crash?”
With Bitcoin trading below $35,000, all professionals, analysts, and investors were curious about cryptocurrencies’ future.
Henceforth, to fully comprehend the May 2021 market crash of crypto, lets delve deeper into the events that led to this descent.
What Ushered the May 2021 Market Crash?
Similar to every economic rationale, investors’ emotions, psychological standing and expectations play a vital role in the cryptocurrency ecosystem just like it matters in a physical currency stock exchange. The mood swings of this industry are based on similar principles, where the emotions of associated participants have a strong impact on trading.
Additionally, the Crypto Fear and Greed Index had been showing extreme fear among investors since June, mostly induced by the negative news and opinions by the market giants.
For instance, a report was released by JP Morgan in May which asserted that investors are abandoning Bitcoin for gold. Such claims, that too by renowned names like JP Morgan, are enough to stir up the digital money community and cause fear among investors.
News like these, paired with digital currency’s volatile nature and its related environmental risks make matters worse – and that is exactly what happened. Elon Musk’s Influence
The decline of the virtual currency market practically began when the founder of SpaceX and Tesla, Elon Musk, made a tweet regarding Bitcoin.
Having more than 55 million followers, Musk announced in May 2021 that due to environmental risks attached to Bitcoin, Tesla had suspended it as a payment method for their electric cars. This caused havoc in the digital community.
As if this was not enough, the Bitcoin marketplace took another hit – dropping by more than 5% – after Musk’s tweet about digital gold. Even though Musk elevated the Bitcoin market back in 2014 with his influential power, he himself shoved it into a descent 8 years later.
This indicates the enormous power Elon Musk holds to cause massive waves in the digital money economy with his tweets. However, a single entity having such power that controls the rise and fall of a multi-trillion-dollar market is against the principle of decentralization, and thus should be discouraged.
Another major factor in the nosedive of the digital money industry is China’s ban on crypto trading. China’s central bank ordered the shutdown of a company that “was suspected of providing software services for virtual currency transactions” and restricted financial institutions and payment companies from providing virtual trading services.
In June, a massive number of people were arrested for using digital currencies in nefarious ways. Even thousands of virtual money related accounts had been suspended on Weibo (the twitter of China) in that same month.
For years, China has been one of the most powerful Bitcoin mining nations. Following China’s war on cryptocurrencies, more than half of the network’s hash rate vanished, adding to the market’s downward spiral.
Delayed Tax Day
Virtual currencies like bitcoin are treated as property by IRS. That means they are taxed in the same way as stocks or real property. For instance, if one bitcoin is bought for $30,000 and sold for $50,000, $20,000 of taxable capital gain is incurred.
Owing to the pandemic, the Tax Day – the deadline for people to pay their taxes in order to receive their tax return for the previous year – was delayed by almost a month.
This delay also contributed to a price decrease in both crypto and stock industries, since the biggest sell-off in the virtual currency community must be the result of investors’ tax obligations to cash in digital currencies to pay capital gains.
The cryptocurrency ecosystem has had a rough ride since the beginning of this year. Even though it experienced a major crash in May 2021 – some of the reasons for which are mentioned above –, the following months saw the price of Bitcoin slowly go back up.
It is evident that this industry is volatile in nature, with its value making seismic shifts in light of the latest news. However, the trend of the market shows that a crest is most likely to follow a trough. Lower prices of cryptocurrencies attract potential investors that expect the market to have a self-correction mechanism in place to experience a rise once more. Visit our Blog to Learn more.