On September 7, 2021, the story of Bitcoin took a dramatic turn. The adoption of BTC by El Salvador as its official currency promised a revolution. But the twist?
Instead of the price surging, as expected by the vast majority, the price of BTC shockingly plummeted, dropping by 18%. And it continued to fall in the following days.
Those who do not understand history are doomed to repeat it. The ‘why’ behind this is not casual knowledge; it involves market dynamics, a phenomenon popularly called ‘buy the rumor and sell the news.’
The major rally that started in August 2021 resulted from an excess of optimism, fueled by rumors that El Salvador, led by Nayib Bukele, was interested in acquiring Bitcoins and eventually making Bitcoin legal in the country. Part of this optimism was reflected, especially in futures markets, where large volumes are traded, and it is possible to visualize leverage and market sentiment through indicators.
Market Sentiment before the announcement
The day before Bitcoin Day, the purchase of 200 bitcoins was announced, further increasing FOMO and the feeling of greed.
El Salvador has just bought it’s first 200 coins.
— Nayib Bukele (@nayibbukele) September 6, 2021
Our brokers will be buying a lot more as the deadline approaches.#BitcoinDay #BTC🇸🇻
On the day of the turnaround, September 7, the Fear and Greed Index was at 79 (Extreme Greed), and the Funding Rate reached the value of 0.078%. These were high values that, in combination, were significant for the turnaround and the subsequent price drop.
The Pareto principle helps to understand
By the Pareto principle, also known as the 80/20 rule, which states that approximately 80% of results are generated by 20% of causes, we understand that the vast majority of traders and investors, due to reasons such as an incomplete market understanding, hardly managed to arrive early to buy the rumor, ending up with the average price at the top, over-leveraged in the hope that the price would continue to rise and exposing themselves to a long squeeze.
In other words, small investors missed the good entry point, arrived late, were over-leveraged, and were liquidated, even when the news was positive.
The market was saturated with buyers at the top, leading to a long squeeze.
Buy the rumor and sell the news’ events are important because they profoundly impact the market with significant liquidations and volatility. Even with the drop on September 7, the price had risen significantly in the preceding days, highlighting errors not to be repeated and showing that it is possible to benefit without leveraging and exposing oneself to liquidations.
