After Last Week’s Mass Crypto Sell-Off, Experts Ring in on What Caused the Plunge

After Last Week’s Mass Crypto Sell-Off, Experts Ring in on What Caused the Plunge

 Published: November 24th, 2021

The week of November 15-21 was a disappointment for crypto bulls in a rout that saw the overall crypto market cap plunge by USD 300 billion over seven days.

Bitcoin, the biggest of the bunch, finished the week down by more than 12 per cent, despite speculation in some corners of the market that a new price rally was in the offing.

It was a different story from the week before (Nov. 8-14), where BTC reached an all-time high of USD 69,042. On 16 November, bitcoin dipped below USD 60,000 then kept going, reaching a monthly low of around USD 55,500.

Politics offered one potential explanation for the massive sell-off. The session began alongside an announcement from the White House that President Biden’s enormous USD 1.2 trillion infrastructure bill had passed through congress. The bill came with new crypto tax reporting requirements and broadly defined crypto companies as ‘brokers,’ meaning they would be subject to greater oversight by US financial watchdogs.

BTC fought back and held its support level of USD 55,000. Positive news from bitcoin-friendly El Salvador bolstered the coin as president Nayib Bukele announced plans for a ‘Bitcoin City’ in the Central American country. It wasn’t enough, however, to power a BTC price rise.

Bukele told the press that the new Bitcoin City complex would use geothermal energy from volcanoes in the vicinity and offer any businesses locating there a largely tax-free status, except for VAT.

Plans for Bitcoin City call for half of all VAT raised there to pay off bonds issued on Blockstream's Liquid Network, which will finance the new municipality’s startup costs. The other half will be used to pay for public services.

After the announcement, numbers from CoinGecko show that BTC briefly crossed the USD 60,000 line again but dropped back below USD 57,400 the following day.

Bukele jumped on news of the bitcoin price drop to announce that El Salvador, which made bitcoin a form of legal tender in the country this past September, would add another USD 500 million in BTC to the country’s treasury.

In October, El Salvador’s central bank purchased 420 BTC, bringing its crypto reserves to 1,110 BTC in total.

Ethereum takes a beating

Ethereum, the second-largest cryptocurrency by market cap, found itself down by nearly ten per cent over the week of November 15-21, dropping below USD 4,000 by session’s end on Friday.

The DeFi market’s go-to network for smart contracts had been plagued by spiking gas fees all week, prompting the influential head of one crypto-centric hedge fund to announce that the fund was going to abandon support for Ethereum entirely.

Other major cryptos like Solana (SOL), Binance Coin (BNB), Cardano (ADA), Polkadot (DOT), and XRP were all down at week’s end, with Avalanche (AVAX) being the only notable good news after days of carnage.

Egged on by a host of positive news, Avalanche was up more than 40 per cent for the week and even edged its way into the crypto top ten when it reached a new all-time high of USD 145.00 on Sunday, 21 November. Read more on AVAX ascent to the crypto top table below.

Some winners amid the carnage

While the leading contenders took a hit last week, Avalanche, a low-cost, high-speed blockchain that competes with Ethereum, pushed its way into the top ten list of cryptos by market capitalisation.

According to Coingecko, AVAX began this week (Monday 22 November) at USD 134.43 and reached a market cap of USD 30.16 billion.

Avalanche reached the top 10 just a day after the CEO of crypto hedge fund Three Arrows Capital, Zhu Su, told Bloomberg that the fund had liquidated its Ethereum positions 'despite supporting it previously'. Ethereum's gas fees had skyrocketed across the week, seriously eating into the fund's ETH-related gains.

Three Arrows said it had invested heavily in Avalanche in an announcement following the interview. The move mirrored FTX and Sino Global Capital buys to invest in Solana, another Ethereum competitor. Working on a joint deal with Polychain Capital, Three Arrows helmed a funding round for Avalanche worth USD 230 million in October.

AVAX continued to rise in both price and market cap, after it achieved its position in the top 10 largest cryptocurrencies. By mid-week, however, AVAX had corrected to an extent and was trading at around USD 138 at time of writing.

Avalanche is built with the decentralised finance (DeFi) market in mind. Like Ethereum, developers can use it to create financial services that use smart contracts to facilitate transactions without the need for an intermediary like a custodian or payments processor.

But building decentralised apps (or dapps) on Ethereum can be expensive and slow, especially when activity on the network increases. Because of, or despite, its position as the network behind the second-biggest cryptocurrency by market cap,

Ethereum’s blockchain can only process about 30 transactions a second. The ‘gas’ fees designed to manage congestion on the network can be costly. It’s not unheard of for transaction fees on the network to hit hundreds of dollars.

That isn’t the situation with Avalanche. The DeFi contender can process as many as 4,500 transactions per second. Fees, meanwhile, can be lower than one US dollar for a simple transaction. Larger scale transactions can be more expensive.

To fight off competing networks, Ethereum developers are working on a long-awaited ETH2.0 upgrade, making the blockchain faster and less expensive to use. The hope is that will be enough to stop second- and third-generation blockchains like Avalanche and Solana from eating into Ethereum’s market.

Investors looking for the ‘next Ethereum’ are likely behind Avalanche’s rapid ascent, even as leaders like Bitcoin and Ethereum experience sell-offs.

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