A Night of Terror: Memories of the 2015 Stock Market Crash Behind the "Collapse" of the Cryptocurrency Market

This article was published on Deep Tide TechFlow, author: Moon.

On May 19, a night of horror, the cryptocurrency market experienced a catastrophic crash.

According to OKEx market data, Bitcoin plummeted from a high of $43,816 to $29,000 on the same day, a drop of 33%. If the big brother is like this, the other smaller coins are even more "tragic."

ETH dropped from $3,464 to a low of $1,764 USDT, with a maximum drop of 48% in 24 hours, and many altcoins saw maximum declines of around 50%.

In the futures market, according to Coin data, on May 19, over 570,000 people were liquidated across the network, with a liquidation amount reaching 44.2 billion RMB, and the largest single coin liquidation was $67 million, equivalent to 430 million RMB.

What exactly happened during such a brutal drop?

Looking back at this cryptocurrency crash, we find many similarities with the 2015 A-share market crash.

First, speculation on junk stocks.

Second, the stomping of leveraged funds and chain liquidations.

Third, accelerated issuance of new stocks.

Musk's "Betrayal"

In reviewing this round of Bitcoin's decline, a clear dividing line is the "betrayal" of Tesla CEO Elon Musk.

Since the beginning of this year, Musk has become a fan of cryptocurrencies, frequently promoting Bitcoin, Dogecoin, and other cryptocurrencies on social media, bringing a series of positive news: Tesla purchased over $1.5 billion in Bitcoin and began accepting Bitcoin payments; Musk tirelessly promoted Dogecoin, calling himself the Dogecoin "Godfather"…

The market was booming, with Bitcoin reaching a high of $64,843 per coin, up over 70% from the beginning of the year; Dogecoin even surged 260 times in half a year.

However, on May 13, Musk suddenly "betrayed" the market, announcing on Twitter that Tesla would suspend accepting Bitcoin as a payment method due to concerns about the environmental issues caused by mining.

Although Tesla emphasized in its statement that it would not sell any of its Bitcoin holdings and would resume accepting this payment method once more renewable energy was used in the mining process.

Once the news broke, Bitcoin immediately plummeted, dropping over $10,000, a decline of nearly 15%, while the previously popular Shiba Inu coin saw a drop of nearly 40% at one point.

The farce did not end there.

In the early hours of May 17, Musk hinted in another tweet that Tesla might have sold its remaining Bitcoin holdings, causing Bitcoin to drop over 10%, hitting a low of $42,212.

On the morning of the same day, Musk clarified that Tesla had not sold any Bitcoin. Following this news, Bitcoin briefly surged by $2,500 but failed to recover its losses.

Musk's sudden betrayal, using environmental issues to attack Bitcoin, and his quantum fluctuations between "selling" and "not selling" thoroughly angered investors in the cryptocurrency community, dividing the Bitcoin investor community and the Dogecoin community, creating opposition and unveiling the curtain on Bitcoin's sharp decline.

Chinese Regulation Arrives

Just as everyone was puzzled by Musk's wavering stance, Chinese regulatory authorities took action.

On the evening of May 18, the China Internet Finance Association, the China Banking Association, and the China Payment and Clearing Association jointly issued an announcement on "Preventing Risks of Virtual Currency Trading Speculation." The three associations required that member units such as financial institutions and payment institutions must enhance their social responsibility, must not use virtual currencies to price products and services, must not underwrite insurance business related to virtual currencies or include virtual currencies in the scope of insurance liability, and must not directly or indirectly provide other services related to virtual currencies to customers.

One key point mentioned was:

Engaging in the exchange of legal currency and virtual currency, buying and selling virtual currencies as a central counterparty, providing information intermediary and pricing services for virtual currency trading, token issuance financing, and trading of virtual currency derivatives, among other related trading activities, violates relevant laws and regulations and is suspected of illegal fundraising, illegal issuance of securities, illegal sale of token vouchers, and other criminal activities.

Once this announcement was made, Bitpie Wallet immediately released a message announcing the closure of OTC, coin-to-coin exchange services, and other businesses.

On the same day, Inner Mongolia announced the establishment of a reporting platform for virtual currency "mining" enterprises, allowing the public to report four types of participants, including virtual currency "mining" enterprises and those providing venue leasing services for virtual currency "mining" enterprises.

The announcement from the three departments dealt another blow to the fragile market environment. Overseas, many investors interpreted it as "China will ban Bitcoin," leading to panic selling.

A sharp decline was imminent.

Memories of the Stock Market Crash

Looking back at this cryptocurrency crash, we find many similarities with the 2015 A-share market crash.

First, speculation on junk stocks.

In 2015, the hottest investment targets in the A-share market were stocks like Storm Video, Qiantong Education, and LeTV, which had no core competitiveness: Storm Video had 29 consecutive daily limit-ups; Qiantong Education rose several times, surpassing Moutai to become the highest-priced stock; LeTV's market value peaked at 170 billion yuan…

Junk stocks soared, and retail investors rushed in, a typical characteristic of a bubble.

The same is true in the crypto space; driven by Dogecoin, Shiba Inu coin, Husky coin, Pig coin… and many other fundamentally weak coins became market hotspots, surging hundreds of times, triggering a speculative frenzy.

The proliferation of air coins and speculation distorted the original market funding structure, with a large amount of retail funds withdrawing from mainstream coins and pouring into animal coins, leading to a more fragile market as funds became more dispersed.

Second, the stomping of leveraged funds and chain liquidations.

How does a bull market come about? It comes from leverage and goes away with leverage.

The bull market in the 2015 A-share market was the result of accelerated entry of leveraged funds, continuously accumulating leverage, a typical "leveraged bull."

According to a research report released by Haitong Securities, at the peak of the 2015 A-share market, the scale of leveraged funds was about 4 trillion yuan, mainly including: on-market financing of 2.27 trillion yuan and off-market financing of about 1.8 trillion yuan.

Leveraged funds are very sensitive to market declines. When the stock market turns bad, to avoid being forcibly liquidated by the system, many leveraged funds will quickly exit the market or be directly liquidated, which also causes stock prices to fall, triggering larger-scale chain liquidations.

"Crash------Forced liquidation------Further crash------Larger scale liquidation," one wave after another of crashes mercilessly threw investors into the abyss of the stock market crash.

This year, the cryptocurrency market is no different.

Thanks to the rise of decentralized finance (DeFi), investors can easily mortgage Bitcoin, Ethereum, and other cryptocurrencies in various lending protocols, obtaining USDT stablecoins at a collateral ratio of 60%-80%, and then reinvesting in the market to purchase assets, continuing to pledge and cycle leverage.

On the morning of May 19, the total amount pledged on Ethereum across the three major lending protocols Maker, Aave, and Compound reached $33 billion. Centralized exchanges and wallets also provide collateral lending and other financial services, and the entire market's prosperity is built on leveraged funds.

Such a market is prosperous yet fragile; once a significant drop occurs, it can fall into a continuous death spiral of stomping, crashing - liquidation - crashing again - liquidating again…

According to Debank data, as of May 20, the 24-hour liquidation amount in mainstream DeFi lending protocols reached $629 million.

Similar to the 2015 A-share market, the essence of the crash is violent deleveraging.

During the terrifying night of May 19, what was even more thrilling was that Sun Yuchen's 600,000 Ethereum (worth $1.5 billion) was almost liquidated. If these 600,000 Ethereum had been dumped into the market, it would have triggered a new round of declines and a complete collapse.

Crypto tycoon Shen Yu commented, "If ETH drops another 100 or so, (Ethereum) will probably see below $1,000 tonight."

According to Twitter account Philippe Castonguay, the lending platform LiquityProtocol was just 2 minutes away from liquidating Sun Yuchen's 606,000 Ethereum. In a very urgent moment, Sun Yuchen repaid $300 million to prevent the liquidation, almost becoming the "Bill Hwang" of the crypto world.

Recalling that moment of terror, Sun Yuchen posted on Weibo, stating, "There was indeed a moment when a bullet grazed my scalp, making me break out in a cold sweat."

Third, accelerated issuance of new stocks.

During 2015, the China Securities Regulatory Commission changed the new stock issuance from once a month to twice a month, leading to a large number of new stock issuances that froze a significant amount of funds, increasing the blood-sucking effect on the stock market, weakening the momentum for the market's rise, and intensifying the market's volatility.

In the crypto space, almost every day several new projects are launched on exchanges. Whether individuals or teams, everyone is eager to issue their own cryptocurrency to seek profits in the bull market. New projects continuously emerge, drawing a large amount of funds away from the mainstream market, leaving the secondary market lacking deep funding support.

Saving the Crypto Space

Amid the sharp decline, Tesla CEO Elon Musk tweeted, stating, "Tesla has diamond hands."

Literally, having "diamond hands" means not fearing market fluctuations and holding positions until the target is reached, which can be interpreted as Tesla will not sell its existing Bitcoin.

According to estimates, Tesla's average holding price for Bitcoin is around $25,000, which still has over 50% profit at the current market price.

Cathie Wood, the "Queen of Stocks" in the U.S., also came out to support Bitcoin, stating that she still holds her previous view that Bitcoin will rise to $500,000.

Sun Yuchen also spoke up after the terrifying moment, stating that he had "bought the dip," purchasing Bitcoin worth $153 million (approximately 980 million RMB) at an average price of $36,868 and Ethereum worth $135 million (approximately 868 million RMB) at an average price of $2,509.

How the market will perform next will depend on a new round of leveraged funds and the re-negotiation of various forces.

Wu Jihan, the former founder of Bitmain, is optimistic about the market's future, believing that "a violent bull market is about to unfold," but some investors are starting to retreat, preparing to reserve enough ammunition to "pick up corpses" in a bear market.

"There are no new things in the world; whether in the stock market or the crypto space, as long as the dream of getting rich overnight still exists, the slaves of leverage will continue to push the entire market to cycle between prosperity and collapse, becoming glorious fuel, bursting into a momentary spark, proving that they once existed.

Respect the market, respect the risks!