2017 was triumphal for crypto community. Everybody, summing up the achievement of the year, was celebrating the amazing run of Bitcoin and main altcoins. Nobody doubted that this wonderful way up will continue in the same direction the next year (well, almost nobody — some crypto sceptics insisted that all this crypto thing is a bubble that will soon burst). The optimistic mood with which crypto enthusiasts entered the new year, quickly evaporated, when Bitcoin price started to go deeper in the red every day. Looking at cryptocurrencies’ rate now, many can’t help but wonder whether those sceptics were right or it is just temporary decline.
There are a lot of guesses and assumptions what could be the trigger for cryptocurrency nosedive. Maybe one of them was the catalyst of the price drop, maybe the totality of them lead to the today’s unpleasant situation on the market. We want to introduce you five most possible reasons of cryptocurrency market plunging, so you would be aware of signs that may be harbingers of market problems.
- Inexperienced investors
Bitcoin was created a decade ago, but it’s been only few years since it went beyond the narrow circle of interested in new technology specialists and got attention of masses. As a result, people of all ages, with no previous experience in financial operations, flooded into the market — and thanks to that in particular we witnessed the amazing performance of Bitcoin rate. Everybody — from teenagers who learnt about Bitcoin from social media posts and decided to buy it with money gifted on Christmas to middle class workers, fascinated by constant rise of Bitcoin price, who see it as a perfect way to get some money and move to a new house — everybody became engaged in cryptocurrency market. While traditional financial market is somehow regulated and run by professional traders, who don’t sell every simple stock they have at the slightest sign of drop, cryptocurrency market, full of amateurs looking only for quick profit, became a victim of its own adherents’ ill-conceived behaviour. Now the inevitable results of such popularity uncloak. In case of usual stocks, investors who buy them are ready to keep it as a long-term investment, but Bitcoin and other cryptocurrencies are different — a lot of non-professional traders flooded into the market, attracted by the skyrocketing price. They wanted an instant profit, cashing out digital coins and affecting the rates.
Also 10 years old history of Bitcoin shows that decline in the beginning of the year is a regular thing. Holiday season has a serious impact on the economy at all and cryptocurrency in particular. The truth is in the end of one year and the beginning of the next many people want (and sometimes need) to cash out part of their savings. When price was $1,000 in the January 2017 — the decline to $880 didn’t seem so drastic as fall from $18,000 to $8,000. But with larger scale comes larger numbers.
2. Market manipulations
Small community of investors hold large sums of Bitcoin and can influence the market, causing ascending as well as plunging. As in any asset class, so called whales can manipulate price, but in case of young, speculative cryptocurrency market each action of whales reflect the market state enormously. Orchestrating large sums of digital coins, whales create necessary to them conditions to buy crypto at a low price or sell at a high.
3. Regulations
Every news about cryptocurrency being regulated in some country results in rate change. Last few weeks were filled with news, rumours and guesses about regulations in countries that play important role in the cryptosphere.
First, it was India. “The government does not recognize cryptocurrency as legal tender or coin and will take all measures to eliminate the use of these cryptoassets in financing illegitimate activities or as part of the payments system.” This innocent statement of India’s finance minister Arun Jaitley was interpreted as calling the cryptocurrency illegal and spread with comments like “Arun Jaitley has just killed India’s cryptocurrency party.” If you read minister’s statement carefully, you can see that there is no hint on outlawing digital coins.
Secondly, China blocked all foreign cryptocurrency exchanges. Then shutted down local exchanges. Cryptocurrency related advertisements were removed from search engines and social media. It looks like all this is leading to complete ban of cryptocurrency. Being the “capital” of mining and thus powerful player in the cryptocurrency market, China’s ban influenced cryptocurrencies’ rate. Strong pressure from the government also caused massive shift of miners abroad.
To make things even worse, last week most largest U.S. media outlets received a letter from someone who claims to be a representative of People’s Bank of China (PBOC) with invitation to a conference where will be discussed the outlawing of cryptocurrency and businesses connected to them. According to the phony message, mining of cryptocurrency also become illegal in China. Some media reported, but some published “the breaking news” without any prior checking, adding panic to the market.
Then, South Korea prohibited trading cryptocurrencies from unverified accounts. Users can store their cryptofunds in virtual wallet only if cryptocurrency account and bank account details match. Such heavy regulations destroy the anonymity — one of the core features that distinguishes cryptocurrency from traditional money.
One by one all above mentioned bans and regulations contributed to the crypto market FUD, crashing the rates.
4. The natural decline
Bitcoin became extremely spread and recognizable last year, and December was the peak when people who became interested in cryptocurrency, was intensively buying, as well as serious investors started to invest their money in cryptobusiness — even Bitcoin futures were launched on the two leading American exchanges. Such intensive buying couldn’t continue forever, and now we are witnessing the natural outflow.
5. Crisis period
Only one month has passed from the beginning of this year, but bad news was coming one by one.
Just few days after Christmas, everybody enjoying holidays, not expecting anything bad — and Visa abruptly ends partnership with a large cryptocurrency card provider, deactivating all cryptocurrency prepaid cards. Such cards convert instantly cryptocurrency to fiat money, allowing payments everywhere usual cards are accepted. The most convenient way to spend cryptocurrency funds became unavailable, thousands of transactions were declined. This restriction was a specific issue to WaveCrest, not to all issuers, but many people believed that cryptocurrency cards would never be available again and this is the end of instant payments in digital coins. This news also was important trigger in the market plummeting.
The truth is — this situation is only temporal. There are other issuers that also can release such cards, but it takes time to set a partnership with one. Now all cryptocurrency services that offered cards are working hard to make it earlier than counterparts. TenX, Bonpay and Wirex are three leaders, and one of them is most likely to be the first to release new cards.
In addition to Visa’s restriction in the end of January one of Japan’s biggest cryptocurrency exchanges Coincheck was hacked and lost nearly $500 million in digital tokens. Company has promised to pay back all stolen funds, but, as we can see from the cryptocurrency history, every crash or hack of exchange always resulted in the market plummeting.
Among less serious, but also contributed to the market plummeting news, were the exclusion of Korean exchanges from cryptocurrency price dominant checking site CoinMarketCap “due to the extreme divergence in prices from the rest of the world and limited arbitrage opportunity” and Facebook ban of cryptocurrency and ICO ads. Add to these regulations, that are explained in the third paragraph, and you can see that the last few weeks some negative for cryptocurrency news was coming almost every day. Let’s hope it is just a rough patch.
Bitcoin has had quite a few crashes before, and every one of them was called by joyful opponents “the last one”. According to the poll, conducted by Charlie Lee, founder of Litecoin, in his Twitter, despite the current decline the overwhelming majority of people are certain that price fall is not the bubble bursting, but just decline before next going up. It means that more people now understand volatility is a feature of cryptocurrency, and such up-downs don’t mean that it is the end. Last year Bitcoin started as little-known coin worth $1,000 and finished as globally recognizable rival of traditional money with value of $20,000, showing that everything that seems impossible can happen in crypto world. Kay Van-Petersen, an analyst at Saxo Bank, who predicted Bitcoin bull run last year, says that Bitcoin could hit $100,000 in 2018 — and, looking back at insane history of crypto, it is not difficult to believe this statement.
