This week's "flash crash" that dragged bitcoin (BTC-USD) back below $50,000 — and sent other digital coins reeling in its wake — marred what should have been the momentous occasion of the first sovereign country on earth adopting a cryptocurrency as legal tender.
Despite the ugly price action, most of crypto's true believers are still just that — even as some observers question bitcoin's head-spinning volatility, and El Salvador's decision to throw its weight behind it.
Michael Sonnenshein, CEO of Grayscale Investments, the world's largest cryptocurrency fund manager by assets, who told Yahoo Finance Live this week that other countries are likely to join El Salvador in the race to make crypto legal tender.
And Matt Hougan, CIO of Bitwise, also told Yahoo Finance Live that “it’s the greatest time, I think, to enter the crypto market. A lot of the first decade of crypto was about zero to one. … Now the question is how fast we scale from one to 100. A lot of that is built on what regulatory clarity we get.”
To be sure, it's been a rocky week for digital currencies like bitcoin — which traded above $52,000 on Monday but hovered near $45,000 on Friday — as well as ethereum (ETH-USD) and Cardano (ADA-USD). However, from peak to trough, the latter two didn't lose nearly as much as bitcoin, which suffered offshore outflows upwards of $3 billion during Tuesday's selloff, according to one investor.
On the other hand, the price of cryptocurrency (SOL1-USD), which power the Solana blockchain, is already above its pre-flash crash highs, trading above $175 on Friday.
Anatomy of a 'telltale' crypto crash
In an interview with Yahoo Finance, Jeff Sekinger, a financial guru, founder of the Miami-based crypto hedge fund Orca Capital, said he believes overall crypto market will likely see a lot of growth through the end of this year, despite this week's rout.
Like the week of Coinbase’s initial public offering, this week began with another major market event — El Salvador’s new Bitcoin Law, which was expected to be a boon to the industry.
Sekinger has witnessed his share of crypto market cycles. He first purchased bitcoin in college in 2013, and the 2017 bull market convinced him to leave his job at JPMorgan Chase to focus on the asset class full-time. He started Orca Capital in April two years later.
Breaking down trading volume, open interest levels and on-chain analysis, Sekinger actually called this week’s flash crash in a Youtube video he published on August 31. He told Yahoo Finance it came down to volume and three major upward trends.
“When the perpetual funding, opening interest and price action are all moving up but volume is slowing, it's been a telltale sign for the past three major crashes,” Sekinger told Yahoo Finance.
This time, the downturn came from the combination of high leverage in the markets on top of cryptocurrency traders “buying the rumor and selling the news,” he said. That was proof enough that the market is still relatively small — and still heavily manipulated by a few big players, according to Sekinger.
Acknowledging that market cycles are notoriously difficult to predict, Sekinger said the current bull market in crypto will likely end in the first or second quarter of next year.
“There will be too much euphoria and too much leverage and everything will come crashing down. Because we are starting to see serious money within the space, I think in terms of a percentage correction, it will be less,” said Sekinger.
Currently, Orca has two funds that each hold about 10 to 15 different assets that cumulatively hold $50 million under management today, with 167 limited partners. Since Orca started, both funds have outperformed bitcoin while one doubled the cryptocurrency's return in the last year.
Within two months, Orca will rollout two more funds — including a more aggressive decentralized finance (DeFi)-focused fund. These additions should double their total asset value under management, Sekinger said.
"Retail investors see all these crazy stories about the ridiculous amount of money being made on NFTs and that sparks their interest.”
- Jeff Sekinger, crypto portfolio manager
In terms of leverage, Sekinger said that his funds can lever up to 5 percent of their value, but that they never have had a desire to go close to 5 percent, and typically use it at the most “two to three times per year in small quantities.”
Orca’s future offerings come from retail demand for nonfungible token (NFT)-related investment, according to Sekinger — something he connected to solana's skyrocketing growth over the summer.
“One of the reasons why SOL is blowing up is because a ton of NFTs are moving from Ethereum to Solana because it's so much less expensive to launch, buy and sell on the Solana blockchain,” said Sekinger.
Retail investors "see all these crazy stories about the ridiculous amount of money being made on NFTs and that sparks their interest,” he said.
In light of the wellspring of investment brought into the crypto market by NFTs, investor interest in blockchains with higher transaction speed has quickly dominated price action.
Since its London hardfork update, the Ethereum blockchain is said to perform 15 transactions per second but reports of high fees due to network congestion have sent traders reeling.
Based on tests, Cardano is said to do 257 transactions per second and potentially much more with upgrades while Solana can complete 50,000 transactions per second.