A familiar scenario for any cryptocurrency investor – a continuous fluctuation of prices accompanied by never-ending anxiety.
Anybody who invested even in a small amount of a lesser-known coin would know that one should always be prepared to lose the entire investment.
However, the end of 2017 got everyone in the optimistic mood of making a regular profit from whichever coin you invest in.
So it came as a surprise to some that the beginning of 2018 was so to say… Slow.
Bitcoin and cryptocurrency market crash resulted in the coins losing in value at a rapid speed, leaving the crypto community in panic and the critics in delight.
On January 17, Tuesday, investors woke up to the CoinMarketCap’s sea of red showing all coins plummeting in red.
The price fall had such an adverse effect that some compared the current cryptocurrency situation to’Black Tuesday‘ 1929 Wall Street Stock crash.
Perhaps it’s too exaggerated but not as much as a trending message on Reddit with a U.S. National Suicide Line or describing the day as ‘Crypto Bloodbath‘.
Those who experienced Bitcoin reaching $20,000, and are seeing it plummeting to a little over $10,000, it must feel like a stab.
Nonetheless, before jumping to the conclusion that the crypto bubble is bursting and the whole thing is just a mockery of the financial industry; the reason behind a crush might be more straightforward than you think.
And no, China’s ban is not the only aspect of it.
Let’s not forget that cryptocurrency is, at the end of the day, an asset that involves both fiat currency investment and it can be quickly turned back to fiat currency.
So with the New Year blues and the end of tax year approaching slowly, there might be more reasons behind the January cryptocurrency blues.
Top Reasons Behind the January Cryptocurrency Crash
All major cryptocurrencies are experiencing a severe price correction, with the size of the market shrinking from about $830 billion a week ago to $570 billion, according to CoinMarketCap.
One of the major contributors to the market correction is an unstable cryptocurrency situation in Asia, but we will discuss it in the next paragraph.
During 2017, we have seen massive growth and hype around cryptocurrencies, which naturally has to back to normal after reaching its peak.
Bitcoin on its own rose by 200% between October and December, with other cryptocurrencies spiking alongside.
Pawel Kuskowski, the CEO and founder of Coinfirm, which provides cryptocurrency compliance services, told Business Insider that it was “a correction, a long-expected correction.”, adding that “the correction was quite needed because it was just absurd what was happening.”
South Korea and China Banning Cryptocurrency Exchanges
China has a very firm stand on cryptocurrency – it cannot be controlled or accessed by the government. Hence it should be banned.
The cryptocurrency embargo has started with an ICO crackdown, slowly escalating to banning cryptocurrency mining, and now, potential shutdown of all centralised cryptocurrency trading platforms.
China is the centre for some of the most significant cryptocurrency exchanges as well as mining pools, which has slowly started moving out to different parts of the world.
Naturally, miners and exchanges will soon find another place to settle, but the entire process will take time.
It’s understandable that China-based investors, and those using Chinese exchanges, could have sold their cryptocurrency profits at the doom of potentially losing everything. And, considering that China is the most abundant Bitcoin producer, we shouldn’t be surprised the market was hit badly.
China’s primary argument is preventing the criminal activity which comes with allowing cryptocurrencies. However, there are already alternatives being created.
Elsewhere, some market commentators are blaming the slump on Chinese Lunar New Year, arguing that many who celebrate the Asian holiday are cashing out cryptocurrencies to pay for gifts and travel associated with this time of year.
Similarly, South Korea is preparing to ban cryptocurrency trading – and as the third world’s biggest crypto market, it had a considerable impact on the trading prices.
Even though the government has stated that the decision hasn’t been finalised yet, the situation doesn’t look good in South Korea.
In the meantime, investors are already getting a taste of how a market would behave without the Asian investors.
Matti Greenspan, an analyst from a cryptocurrency trading platform eToro, told Business Insider that volumes from Japan and South Korea had been dropping in the last few days.
Traders in these markets are usually buyers. Hence a large-scale exit could have created an imbalance in the market by driving the prices down and sparking panic.
Tighter Cryptocurrency Regulations Around The World
China is not the only country expressing its doubts about cryptocurrency.
The majority of European countries have already planned on tightening the cryptocurrency law and taxation.
Until recently, cryptocurrencies have been on a somewhat free run, and depending on the local jurisdiction, not everyone had to pay taxes on the cryptocurrency income. Digital currency has also functioned as a perfect way of money laundering (as much as you don’t want to hear that, yes, it did).
However, due to the Bitcoin’s price skyrocketing, more banks and authorities around the world have started looking closer at the cryptocurrency investment.
For commercial investors, a tighter regulation means one thing – an extremely complicated process of investing and withdrawing cryptocurrencies.
Those who are experienced, have an advantage of either continuing to trade between various cryptocurrencies or using exchanges that know how to bypass those regulations.
Newbies, on the other hand, need a service that is not only easily accessible but also one that allows card payments and smoothes out the entire process.
And if they cannot get it? They will likely give up at the very beginning and forget about cryptocurrency.
The lack of new investors results in one thing – decreasing market cap and cryptocurrency demand. Ergo? The prices will drop.
At the same time, the Russian prime minister – Vladimir Putin – stated that cryptocurrencies would require legislation.
The US crypto market doesn’t look that promising either.
Supposedly, the Metropolitan Bank has suspended all cryptocurrency-related international transfers due to one of the bank’s clients cross-country fraud (the bank has denied the change of policy).
It wouldn’t have such a significant impact on the cryptocurrency market, if not the fact that Metropolitan Bank’s clients are prominent cryptocurrency companies, including cryptocurrency exchange Coinbase.
Bitcoin Futures Maturing
This is perhaps one of the wildest theories, and it poses some controversies. However, it is worth considering.
Cboe and CME Group both introduced Bitcoin Futures contracts in mid-December, allowing institutional investors such as hedge funds to speculate on the future price of the digital currency.
The first bitcoin contracts, which are cash-settled, matured on Wednesday. The contract’s settlement price is determined by a price auction on the Gemini exchange at 4 p.m. on Tuesday.
The coincidental timing brought speculations that the rapid and aggressive selling activity could have been done on purpose to drive the Bitcoin price down and turn the futures contracts into a profitable investment.
However, as pointed out by Greenspan, Bitcoin wasn’t the only plummeting cryptocurrency, but also all the other altcoins.
Bitcoin Price Plummeting
Before we move on, let’s get some things straight.
If anyone was thinking that Bitcoin will just keep on going up and hitting an all-time high without correction, then… Well, you shouldn’t be investing in cryptocurrency in the first place.
This is the nature of cryptocurrency, and especially Bitcoin – it fluctuates. Usually, we notice an opposite trend, if Bitcoin price rises, altcoins go down in value and vice versa.
This time, however, plummeting Bitcoin dragged the altcoins as well.
The market circulation of Bitcoin has been continuously growing ever since. In 2017 alone, it increased by almost one million.
The majority of these investors, however, were people who either heard about Bitcoin and wanted to try it out or serious investors, who invested in Bitcoin only to exchange for much more profitable altcoins.
And let’s be honest – it’s the former that tends to disturb the market on a larger scale.
How many times did you hear from your friends or family about their intentions of investing in Bitcoin – probably a lot?
The truth is – if someone were genuinely interested in cryptocurrency, they would have invested long time ago, not when Bitcoin was on its way towards $20k mark.
Those who just followed the trend could have made a profit but lacked in the market knowledge. Therefore, deciding to exit the market and withdraw their earnings, causing a substantial drop in price.
The Plummeting Blind Circle
Yet another familiar situation – how many times you did something just because everyone was doing it, so you panicked and followed the crowd?
I can only imagine it was more than a few times.
So as soon as the market has started plummeting, even if they were prepared for a dip, a lot of investors panicked and sold their coins – making the situation even worse for themselves.
And if they haven’t sold everything, they probably slowed down their investment.
Now seems to be a perfect time to invest since the coins are reaching their rock bottom, but investors are still not convinced if the market will stabilise itself.
There’s a concern that the market might never recover and investing now will only lead to further loses.
Without realising, the market is currently in a closed loop of panic-buying and panic-selling.
The more we sell and the less we invest, the more the market will suffer and the more the prices will plummet.
Of course, all factors are contributing to the big cryptocurrency crush. However, there are some wilder theories circulating online.
Because… There could always be more to it, right?
One of the speculations is based on people being simply… broke. So the cryptocurrency investment is probably the last thing they are thinking about.
As odd as it may sound, it kind of makes sense. Still, not the extent of crashing the market, but could have been one of the factors.
Fewer people are willing to invest at the moment then there were a few months ago – the lack of market stability and an anxiety of a potential loss add up together.
Additionally, in most countries, the tax year has finished either in December, or it will come to an end in April.
With such a big cryptocurrency year as 2017, a lot of investors made a significant profit that has to be taxed. Regardless of whether they traded cryptocurrency for another one or held it for a year; cryptocurrency is a taxable event.
So here’s what you have to ask yourself – if you had to pay a hefty tax bill on your significant cryptocurrency earnings, would you go back to investment straight away?
What’s Going To Happen? Is This The End of Cryptocurrency?
If this thought is crossing your mind, then you have to remember one thing that you have probably always kept on repeating to cryptocurrency sceptics – cryptocurrency is here to stay.
The market is currently going through a correction and various changes. It will likely stay volatile for the rest of the year, but this is not a sign of a market collapse.
A large percentage of Bitcoin owners is based in China and South Korea, so undoubtedly the unstable stand on cryptocurrencies within these countries have a considerable impact.
There are already predictions that Bitcoin will reach $60,000 by the end of 2018 according to Julian Hosp from TenX. Whether you choose to believe or not, is your choice, but it’s unquestionably something to remember.
It might sound unrealistic, but so was the last year’s prediction of $10k and $20k. Yet, it happened.
Bitcoin investors could also be evolving – from individuals to large organisations which are planning to enter the cryptocurrency market.
We also seem to be forgetting about the launch of Bitcoin Futures contracts – we cannot assess its impact yet, but maturing of the futures contract could have contributed to the cryptocurrency market’s fall, or at least Bitcoin’s.
For the time being, however, instead of wondering about the Bitcoin and cryptocurrency crash as well as fuelling your worries with endless Reddit rumours; try to analyse the market a bit more in depth and look at with an eye of an investor.
The volatility of Bitcoin — and other cryptocurrencies — is an expected, and essential, part of the journey to becoming a mature asset class. Thus, investors shouldn’t be too scared.
Remember, cryptocurrency investment is a marathon, not a sprint. Be patient and keep a cool head.
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