Explained: Double-spend or profit-booking, what spurred the Bitcoin sell-off?

Bitcoin dropped below $30,000 on Thursday, but marginally rose to $32,000 on Friday as the cryptocurrency continued a free-fall after quadrupling in value last year.

The drop, however seems to continue, even as some important financial players warm up to the digital currency. BlackRock, the world’s largest asset manager, has allowed two of its funds to invest in Bitcoin futures. Sequoia, a software and engineering firm, has given its employees the option to accept payments in Bitcoin.

However, neither of the two positives seems to have boosted the price of Bitcoin. While it’s easier to pinpoint the reason — like profit booking in most cases — this time it’s difficult to say why the digital currency is on a down trend.

Sure, Janet Yellen — nominee for Treasury Secretary in President Joe Biden’s administration — publicly denounced Bitcoin, the sell-off does not really coincide with her comments.

Another reason that questioned the viability of the token was a trade blog by BitMEX Research that reported an instance of a successful double-spend, which in reality was an unsuccessful attempt. A double-spend basically happens when a sender tricks a recipient into accepting a transaction, which is actually sent to the sender himself.

Lucas Nuzzi, co-founder and adviser at Digital Asset Research, took to Twitter to explain what actually happened.

Bitcoin was created with an intention to be a currency that did not require any centralised authority to oversee transactions. Bitcoin is transacted on a blockchain — basically a spreadsheet that logs the whereabouts of the coin. Transactions logged in the blockchain are verified by an unaffiliated third party, often more than once.

A double-spend would mean blockchain has been manipulated, rendering its cause ineffective. However, since no new coins were added to the system, double-spend did not occur. Instead, same coins from the same digital wallet were registered in two different blocks during a split in the blockchain. This is not double-spending because only one of these transactions was considered valid.

Bitcoin ended 13 percent lower on Thursday — it’s largest daily drop since the market crash of March 2020. Coindesk reported another instance of short-term profit booking based on the US-based exchange Coinbase. Leading altcoins are also reporting loses in double-digits.

In recent weeks, Bitcoin has been weaker when it’s daytime in Asia and stronger when it’s daytime in the US. This suggests a change of pace in two parts of the world.

Nonetheless, it doesn’t mean that US traders are not a part of this correction. Analysts believe they have been attempting to trade, anticipating lower Asian sessions, John Todaro of cryptocurrency analysis firm TradeBlock told Coinbase.

Analysts quoted several reasons that would have triggered this sell-off, like the unwinding of leverage in Asian markets, concerns about fewer buyers coming into the market, and uncertainty regarding Biden’s stand on digital currencies. They believed some institutional investors are using this uncertainty to make a profit. Many of these players from the US and Europe joined the market before its steep increase, so the chances of profit-making are higher.

This uncertainty may also be seeping into some investors, due to the coming-in of Biden, Todaro hinted. Yellen has proposed to tax unrealised capital gains, that would impact not just cryptocurrency investors, but any investor, and may have resulted in selling, Todaro explained.

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