As the Bitcoin rally slows to a halt and begins to show signs of retreat, many are still scratching their heads regarding the possible reason behind Bitcoin’s incredible run. The cryptocurrency reached just over $19k – an almost 45% increase from a month ago. Since then, the immensely valuable cryptocurrency has dropped back to roughly $17k, leading many to believe the Bitcoin rally was fuelled by retail investor hype.

Pantera Capital, one of the most prominent and well known cryptocurrency and blockchain investment firms, published an investor letter Nov. 20 that detailed their thoughts about the rally. In it, they brought up two salient points regarding the basic demand and supply changes in the Bitcoin market:

1. Consumer Demand For Bitcoin Is Skyrocketing, Driven By PayPal’s Cryptocurrency Launch

PayPal (PYPL) and Square (SQ) allowing users to purchase cryptocurrencies in their respective platforms contributes greatly to the demand for cryptocurrency. Pantera estimates that over 70% of Bitcoins being mined are being bought by PayPal alone, while Square Cash’s demand accounts for enough to collectively reach 100% of newly minted Bitcoins.

As with all things cryptocurrencies, retail hype and investor “FOMO” (Fear Of Missing Out) drives explosive and sometimes excessive volatility in price. While PayPal’s decision to launch cryptocurrency purchases may have been the firestarter, the price increase is likely compounded in effect by the many other investors buying Bitcoin based on its increasing price alone.

2. New Supply Of Bitcoin Has Decreased Since The Halving

Although Bitcoin has a finite supply of 21 million Bitcoins that will ever enter circulation, Bitcoin still has a minting schedule that is in progress. With only 18.55 million Bitcoins currently minted, a large portion likely becomes irretrievable with time.

With the halving that happened earlier this year on 11th of May, miners aren’t able to mine as much Bitcoin as before, resulting in two observable effects:

  • Miners are no longer willing to sell their Bitcoin as cheaply
  • The amount of Bitcoins entering the open market is less

The straw that broke the camel’s back was when China started cracking down on over-the-counter (OTC) brokers in the country. Miners in China were unable to sell their cryptocurrencies as a result. Not only did this affect the new supply of Bitcoin, but it also shut off Bitcoin mining operations that had trouble paying electricity bills to keep their farms running – owing to the cash flow-sensitive nature of Bitcoin mining profitability.

Additionally, China also started blocking bank accounts, credit cards and services involved with purchases of cryptocurrency, and even moved to detain and investigate some of the largest players in the chinese market – such as OKEX founder Mingxing “Star” Xu, whose “disappearance” in aiding chinese investigations led to OKEX instituting a withdrawal freeze on assets.

Mining Disturbances Can Severely Affect Prices

Chinese miners account for almost 72% of the average Bitcoin hashrate, and the lack of ways to sell Bitcoin is causing ripples across the market. Miners have to sell Bitcoin on a daily basis in order to fund mining expenses, which primarily include payments for electricity. The crackdown has led to an exodus of miners from China to other countries such as Russia and Kazakhstan, although an overwhelming majority of miners still operate within China due to the cheaply available electricity and space.

Mining pools usually have to pay for these costs in hard cash, which means that their options for liquidation are typically OTC brokers that act as middlemen to deal with large-volume buyers such as exchanges.

Bitcoin Rally Was Fuelled By Retail Investor Hype

The price of Bitcoin was trading just under 2% of its all time high before it started its price correction. It’s expected that many traders had their positions marked for liquidation at this significant price, with over $2 billion of derivative positions liquidated in just 1 day. The funding rate of leveraged trades had also risen to over 0.09%, an indication that the market was overleveraged.

However, the bull market does not appear to be over, as the price holds strong at just over $17k – with the amount of cryptocurrency held on exchanges still at a low of 2,384,913, a strong sign that sell pressure has not significantly increased. While we know that the Bitcoin rally was fuelled by retail investor hype, only time will tell where the cryptocurrency might reach.


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