• dmelczer

Has the Bubble Popped?

After a very brief drop below the psychologically significant $10,000 mark, the Bitcoin community -- and the entire cryptocurrency community -- is in full panic mode. Over the last month and a half, prices have fallen anywhere from 40% - 65% off of their all time highs. There is a lot of "I told you so" from those who insisted that cryptocurrency was a bubble, or that it is a Ponzi scheme. Cryptocurrency is neither in a bubble, nor a Ponzi. I go through that on the Coins Demystified website. Investment values never follow a linear path to the sky, and this correction is a very healthy dose of reality. Investors that remain in the game will be happy when the next bull run finally happens, and those who can afford to buy this dip I believe will be downright ecstatic. But what exactly is fueling this drop? Here are a few things to consider:

1. CoinMarketCap and South Korea

When South Korea opened their cryptocurrency markets with a few local exchanges, an irrational exuberance took over and drove almost all cryptocurrency prices roughly 30% higher on South Korean exchanges than on exchanges around the rest of the world. Ripple's value shot up incredibly high as one example. Realizing how dramatically the prices on those exchanges were skewing values for market capitalization, Coinmarketcap decided to remove the South Korean exchanges from their price averages. As expected, this had the effect of dramatically dropping the price averages that they used and made their data more realistic for the rest of their global audience. However, the law of unintended consequences definitely applies here. CoinMarketCap never announced their intention to perform this adjustment, however, and when the corrected prices were published on their website, it had the effect of dramatically dropping the market capitalization of almost all coins. Ripple instantly lost $20 billion off of its market capitalization, for example. Automated systems that monitor the prices and perform trades based on rulesets saw this price drop and began a process of stop-loss selling. Now remember, none of the coins had announced anything and yet they all dropped significantly and instantaneously. The resulting sell-off became a snowball effect that saw most coins drop by 20%-25%.

In retrospect, CoinMarketCap did the cryptocurrency community a tremendous disservice. By not announcing their intent to modify their calculations, they panicked many investors, and are directly responsible for many people losing faith in the crptyocurrency markets. This should be a public relations lesson to the rest of the community. What you may consider a small and needed change could have catastrophic consequences if not messaged to the rest of the community properly.

2. South Korea Government Official Quotes

South Korean government officialls have been (mis)quoted as saying that the government intends to ban all cryptocurrency trading. This had the impact of South Korean investors pulling their investments out of the market and back into fiat. When China pulled a similar maneuver in October of 2017, most coins dropped by 35%-40%, with Bitcoin and Litecoin being hit hardest. With South Korea, it looks like Ripple is one of the hard coins hit, which considering its centralized design may actually be a good thing for the market long-term. South Korean government officials have clarified their stance and have indicated that there will be additional forthcoming regulations (much like the US SEC, one would imagine), but there will be no outright ban.

3. China is banning mining

The Chinese government in October decided to ban cryptocurrency exchanges within their sovereignty. Huobi, OKCoin, and several other very large exchanges which accounted for almost 40% of world trade volume went dark within a one-month time. Many Asian investors pulled out of the market altogether, dropping prices by about a third across all coins. Recently, China issued a statement that they intend to ban mining in their country. Mining operations can easily be detected as they require enormous amounts of electricity -- especially industrial mining operations like those for Bitmain. Bitmain and other large industrial miners are already well into the process of moving their operations to other countries, including Norway, Switzerland, and Canada (notice the move to colder countries to avoid the need to pay for air conditioning to keep the miners running cool and efficient!) Despite the contingency plans of these companies to keep their operations running and the associated blockchains secured, this accouncement has nonetheless spooked the market considerably as this is yet another attempt in the non-stop war of governments against decentralized currencies. Make no mistake, whatever these governments can't control they will always attempt to shut down.

4. China is banning access to exchanges

Keeping with #3 above, China in October banned exchanges from operating within its jurisdiction. Now, China has announced plans to prevent cryptocurrency traders from accessing exchanges outside of China. Access to these exchanges will be cut off using the "Great Firewall of China". The Chinese government has not yet specified when this ban will be implemented, they have only signaled their intention to restrict this trade even further. This is yet one more attempt by the Chinese government to shut down what it can not control.

5. Similar drops happen every January since 2014.

Although typically happening a little bit earlier in the month, there have historically been significant drops in the large currencies (Bitcoin, Litecoin). For coins with smaller sample size (Ethereum for example), 2017 and 2018 seem to have had similar drops as well. Although the author is purely speculating here, there could be a number of reasons behind these drops. One could be profit taking after closing year-end books in December. Another explanation is cashing out to fiat to pay off credit cards after a generous Christmas gift-giving season.

While all of the aforementioned reasons may be valid, this year's drop is larger and later in the month than usual. One guess is the expiration of futures contracts on the Chicago Board Options Exchange and the Chicago Mercantile Exchange may have investors shorting Bitcoin for profit. Of course, if Bitcoin drops, most other altcoins follow. It remains to be seen what the long-term effects of futures trading will have on Bitcoin, and by extension the larger cryptocurrency market.

While all of the above may partly explain the historic drop in prices across almost all cryptocurrencies, the important thing to remember is that this market is compeltely unregulated. There are individuals that hold enough coin to be able to move the market by their actions alone. If these "whales" can move the market, they can manipulate it for their benefit. They may have dropped the price only to buy more cheap coins and increase their holdings. This is a good time to remind everyone of the golden rules of cryptocurrency investing:

  • Because of its unregulated nature, crypto markets are very often unpredictable.

  • NEVER invest more than you can afford to lose

  • Hold for the long term, statistically your profits will be far greater.

  • NEVER invest in anything you don't understand. Do your research and don't worry about the "FOMO" (fear of missing out).

  • NEVER invest emotionally. Logic and rational analysis always win the day.

Regardless of the cause(s) of this year's drop, the historical charts are very easy to analyze. After every January dip, there has typically been an enormous price increase around the June/July time frame. If historical trends hold, we'll see yet another meteoric rise this year where all of our coins will once again touch all time highs and surpass them. I hope everyone can hold on until that moon shot. Happy trading!

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