Market Analysis: Massive drop in trading volume leaves traders puzzled? SBF lists five possible reasons but admits, "Cannot predict"

Following the crash on May 19th, the cryptocurrency market continued to fluctuate and decline yesterday (23rd). According to FTX data, Bitcoin (BTC) fell by 7.3% in a single day, with intraday declines even exceeding double digits. While veteran traders in the "coin circle" may not be surprised by this decline, seasoned traders still sense something unusual.

Decentralization of the Spot Market

Sun Binsheng analyzed that from the consolidated data, it can be inferred that this decline is not driven by derivatives, but is more likely related to Chinese regulatory policies. Last Friday, the State Council of China made it clear that it will crack down on Bitcoin "mining and trading" activities. As soon as the news was released, the USDT to RMB prices on Huobi and OKEX instantly plummeted (see the image below).

He explained that in the past, most of China's regulatory measures were aimed at restricting the involvement of financial capital in digital currency trading and curbing speculative activities, but this time it specifically mentioned cracking down on Bitcoin mining and trading. The level of regulation issued this time is much higher than before, and Liu He, the current highest-ranking Chinese official to publicly order a crackdown on Bitcoin, has an unprecedented level of influence that cannot be compared with previous regulatory news.

He believes this may also explain why Bitcoin plummeted in low volume over the holidays. Since the news from the State Council was released at 10 pm last Friday, the relevant policy details will not be released until this week. Some mining pool operators and traders may be concerned that the implementation details will include significant bearish news, so they hurried to sell off their coins over the holiday, causing the OTC price of USDT on major mainland exchanges to drop from a 1-2% premium to a discount. "There is a special force in the market selling coins over the weekend, and with lower liquidity on holidays compared to weekdays, this may be the reason for the continuous decline in Bitcoin and the plunge of altcoins," Sun added.

Sun's speculation aligns with a tweet from Wan Hui, Managing Director of Danhua Capital, on the day the State Council announced the news, mentioning that some large miners in China ruthlessly sold off their coins:

Knew a few big miners already cashed out in last 6 hours since the news is out, sold relentlessly and grabbed all possible channels for fiat off ramp

Once tether price stabilized so as the sell pressure

— Dovey "Rug The Fiat" Wan🪐 (@DoveyWan) May 21, 2021

On the other hand, the warning from the three major financial associations in China about Bitcoin trading is likely the main reason for this decline.

Not only in the cryptocurrency trading market, but the Chinese government has actually been implementing "credit tightening." The People's Bank of China has begun to scale back pandemic-related economic stimulus measures in advance to strengthen risk control, establish market discipline for the most vulnerable economic activities, and the cryptocurrency market is one of the "vulnerable" economic activities.

Sun stated:

"The decoupling of the spot market is likely the reason for the lackluster rebound and subsequent decline, coupled with the Chinese government's credit tightening exacerbating this phenomenon. Perhaps this can explain why miners or traders are selling their positions when liquidity and clearing volumes are so low."