The Crypto Market will most likely not recover until the start of next year: Two reasons why

Introduction

These past two months many investors have been shocked by the slow bleed of the crypto market. Many cryptos have lost substantial amounts of their value, and attempts for recovering the prices have failed. The result is a tug of war between bulls-bears in which bears are currently winning.

While this sounds easily understandable it's actually not. Many crypto influencers made crazy claims for EOY, but they didn't do this for no reason:

1. Q4 is generally bullish in terms of price action
2. BTC Hashrate after China mining ban experienced a strong recover with new all time high
3. Record low amount of BTC in exchanges
4. The successful implementation of the BTC Taproot update.
5. continuous buying pressure from Whales (as seen on bitinfocharts) and institutional investors for the whole crypto market
6. Increasing % of Long term holders while the prices are slowly bleeding
7. Crypto being recognized more and more by the general public

While it's never easy to explain price-action (and actually not super relevant either), I was interested to understand what caused this unusual slow bleed without blow-off top.

Reason 1:

While China has tried to stop crypto several times in the past, this year seems to be a permanent ban (most likely due to the creation of their CBDC). This has caused two drops this year, however these dips recovered.

But, some sources state that China has started to put more pressure on their crypto ban. Chinese citizens have received a deadline this year to get rid of their crypto, otherwise there will be repercussions.

To make this story short: The popular exchange Huobi Exchange with many Asian users is showing a reversal in available BTC on their exchange compared to other exchanged like Binance/Kraken/Coinbase etc. This trend is expected to at least continue into 2022:

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Source: Glassnode

Crypto decreasing from exchanges means two things: Either being sold or taken off exchanges to be put in personal wallets. The latter is bullish but the first is not. While Western exchanges also show a downtrend for Exchange balances, their decrease is not as steep as the Huobi Exchange is showing.

This strongly indicates that most of their users are actually selling.

Reason 2:

The second reason is related to mostly institutional investors making use of a taxing loophole in the IRS regulations. This loophole has been detected already by regulations, but will be allowed for this last year. Some of you might know this already; Wash sales

Instead of explaining this issue, I can better explain the concept with this picture:

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Source: https://cryptotrader.tax/blog/cryptocurrency-tax-loss-harvesting

You might wonder: But if wash sales were always allowed for crypto, why have previous crypto market Q4 years actually shown many gains, like last year?

Answer: Institutional investing in the crypto market was not really present in the previous years. Yes some companies like Microstrategy have actually started earlier in the past (and probably applied Wash Sales), but they were not with enough back then. This year has shown a massive increase of institutional investing and therefore allows much more crypto capital to be sold in November/December for wash sales.

Bonus reason:

This year saw an unusual amount of new crypto investors in exchanges by new (and young) investors. Many were influenced by Social Media and believed the (experienced) analysts with their EOY predictions. These new investors are not able to cope with this unusual price action and are easily scared. This caused them to sell (as seen in Glassnode data on their website - about short-term investors) in this market and therefore putting more pressure for a reversal

TLDR:

• The Crypto market is bleeding because of China ban having a 'deadline' for this year to sell crypto. Huobi Exchange (and a few others) show this.
• Institutional investors have increased this year, this causes more effect of wash sales because they own more capital than in previous years.

What does this mean? --> Retail is selling while whales are slowly adding the China sells and short-holders Western crypto to their wallets. This causes a slow bleed in the market because dips are actually being bought but not strong enough to break through the downtrend.

If you are debating to sell/not I suggest holding for one more month (no financial advice). This is because of the reasons stated above, and ~8B options ending this month which causes volatility.

EDIT: Typos & Thanks for the awards guys