Why Bitcoin suddenly plunged from US$10,200 to $9,400

The gradual Bitcoin rise was weeks in the making, then gone in a couple of minutes.

Bitcoin has plummeted from above $10,000, down to US$9,400, in a matter of minutes. About twenty minutes, to be more specific, with the vast majority of the drop happening in just a couple of minutes flat. It's the fifth-largest single price drop in Bitcoin's history.

The plunge came some hours after Binance suspended trading, citing issues with a market data feed, and then switched it back on, but the timing difference suggests it's not directly to the Binance outage.

And yet, there are still some oddities afoot.

While deposits were suspended on Binance, Whale Alert picked up on an approximately $10 million Bitcoin deposit moving from an unknown wallet to Binance.

941 #BTC (9,473,626 USD) transferred from unknown wallet to #Binance

Tx: https://t.co/PkdJPNCcY4

— Whale Alert (@whale_alert) February 19, 2020

As Binance CEO Changpeng "CZ" Zhao explained, this was when deposits were switched back on for a live test - just a casual little $10 million test.

Turned deposits on for just a second to do a live test. Waiting for charts to catch up, then we are good to go.

— CZ Binance 🔶🔶🔶 (@cz_binance) February 19, 2020

It's a bit unusual, but there are still a good number of reasonable explanations for this. Depending on how exactly Binance moves funds between its wallets, the nature of the outage and so on, it could mean nothing.

It's all the other large Bitcoin transfers to exchange wallets you have to watch out for. Some hours before the big drop, Bittrex shuffled around half a billion dollars of Bitcoin between its own wallets, which may have put the markets a bit on edge.

This was slightly preceded by a 500 BTC move to Huobi, and closely followed by 750 BTC to OKex, another 1,006 BTC to OKex and 1,000 BTC to Korbit. And once Binance came back up, and after the markets had already plunged, another 941 BTC moved to Binance.

That's a lot of money moving to exchanges in a fairly short time, with a fairly strong emphasis on Chinese exchanges. Korbit is based in South Korea, but it picked up a decent chunk of the Chinese cryptocurrency market when the crypto trading ban came into effect in 2017. Similarly, Binance started life in China but is now based in Malta as a result of China's crackdown.

The bulk of Bitcoin mining operations are based in China, so from the movements of these funds and the exchanges involved we can speculate (admittedly quite wildly, and without anything especially concrete) that Bitcoin miners decided now was a good time to lock in profits.

This theory is reinforced by a confluence of factors.

Firstly, it was inevitable that miners would have to lock in profits eventually. There's a lot of selling pressure waiting in the wings, which tends to turn prolonged Bitcoin price rises into a game of chicken, where people try to ride it up as high as possible before selling.

Bitcoin prices were struggling to get too much altitude above $10,000, and moving sideways-ish in that range for a while prior to the drop. It probably made a lot of people increasingly twitchy, and brought their fingers closer and closer to the "sell" button.

Secondly and thirdly, the impending Bitcoin halving stands to drastically cut miner profits. Miners were hurrying to upgrade their equipment in preparation, but the coronavirus outbreak and quarantine has delayed the release of new mining machines. This has seen miner profit margins tighten considerably, and some reports say that the break-even point for Chinese miners still saddled with old gear is a Bitcoin price of about $10,000. Selling above that price point, if you can, may be a healthy decision.

The advantages of a price drop

There's also an argument that miners benefit from a Bitcoin price drop right now. With mining profitability sitting around the $10,000 Bitcoin price threshold, a chunky mining difficulty drop could help buy some extra breathing room for those who are under pressure.

One way of accomplishing this is with a hearty price drop. By selling off a large amount of Bitcoin above $10,000, and pushing Bitcoin prices into the low $9,000 range, you can simultaneously lock in your profits, buy some more operating time and push a large portion of the industry into the point of unprofitability. If unprofitable operations stop mining, the mining difficulty should drop which should help improve margins for those that remain. The cherry on top, of course, is that you can short the market at the same time.

As such, it could be interesting to look at Bitcoin hashrate and mining difficulty, as well as prices, in the coming couple of weeks. The next difficulty adjustment is expected about 5 days from now, so this admittedly tenuous theory suggests we could see some price suppression, and Bitcoin prices staying under $10,000 for about the next week, to help usher in a difficulty reduction.

Or maybe everything here is completely wrong and it's just the Bitcoin market doing Bitcoin market things, or aliens or something.

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Disclosure: The author holds BNB, BTC at the time of writing.

Picture: Shutterstock