Unless you’ve been living under a rock, the last few months have had everyone’s attention drawn towards the cryptocurrency world, with a front-runners being Facebook’s whitepaper release on Libra (18th June), Ethereum’s code first code freeze for Phase 0 of Ethereum 2.0 (30th June) and Bitcoins crazy surge (that began around the 22nd of June). With the effects of all this speculative hype, the cryptocurrency world just proved how volatile and unregulated it really is.
After setting a 15-month high valued at nearly $14,000 on the 26th of June, Bitcoin fell by about 30% to below $10,000. This goes against all the initial hype and fire that claimed that Bitcoin would reach “new peaks” at $60,000 to $100,000 – proving that volatility is the only thing we can be sure of with Bitcoin. At the time of writing this article, the value of Bitcoin is at $10,247.75. According to price data from CoinMarketCap, Ethereum, Ripple’s XRP and litecoin – the 3 top cryptocurrencies after bitcoin – also faced drops in value between 5% – 10%.
Some noted reasons for the decline include: Buyer exhaustion and Speculation (isn’t it always).
Recent technical data leading up to the drop showed signs of buyer exhaustion across the cryptocurrency market. Buyer exhaustion, according to Investopedia, is the situation in which a majority of participants trading in the same asset are either long or short, leaving few investors to take the other side of the transaction when participants wish to close their positions. Continuing with Investopedia’s description of the phenomena, we can use their example of the auction to explain it:
At an auction, there are bidders and sellers. The former are bidding on an asset or security to buy it, and the latter are offering a price for buyers. When there are more buyers than sellers in the room, the price goes up. Likewise, when there are more sellers in the room, the price goes down.A trade is exhausted when the price of the asset or security has moved too far in one direction. This may occur when the number of buyers in the auction dwindles and sellers start to take over. Exhaustion is reached when the asset or security does not have the support from buyers or sellers to continue moving up or down. When this happens, traders can expect a trend reversal. Suddenly, buyers seats are filling up with sellers, or vice versa. These trend reversals help traders select entry and exit points in the market.
“We fell off a cliff here, supported by the bottom of this descending triangle,” said crypto analyst and BlockTV reporter Joe Saz. “I believe this descending triangle is going to be a violent breakdown. I don’t typically have a red flag emergency, but it’s looking very bad right now.”
With regards to speculation, reports that an investor placed a large short order – $200 million – on Sunday betting that the bitcoin price would go down in shortly, sent investors into a panicked-frenzy. Aside from this, there had already been an increasing number of reports surrounding the topic that cautioned – or warned rather – against and imminent drop in Bitcoin due to the unhealthy parabolic gains that the cryptocurrency had recently experienced. Simon Peters, an analyst at global investment platform eToro, said: “We appear to be in a period of indecision, where the market is figuring out where to go next after its heavy surge and sell-off.”
Analysts and Crypto Experts argue that this pull-back is indeed a good and healthy thing – a much needed cool down to the heated bitcoin market trends.
“The deep pullback last Wednesday night was like a bucket of ice water that was dumped on the anxious crypto market, which was indeed getting a bit too hot,” Mati Greenspan, senior market analyst at brokerage eToro, wrote in a note to clients yesterday.
“The prospect of prices rising too far too fast had some traders feeling fearful, so it’s good to see things relaxing somewhat.”
Joe DiPasquale, CEO of cryptocurrency fund of hedge funds BitBull Capital, offered a similar perspective, saying, “The pull backs are healthy and are preventing an unreasonable climb. Moreover, altcoins as a whole are not losing so much value in terms of BTC prices, which indicates that sellers are not moving out of crypto into fiat but merely balancing portfolios.”
Going forward, Todaro had faith in in that the volatility of cryptocurrencies will remain relatively subdued, he said, “It would be ideal if the asset class cooled off some, and traded in a range of $9-11k, as the recent move to $13.5k was very quick and risked burning out in a significant correction,” he stated.
Investors hope Facebook’s entry into digital currencies will bring greater legitimacy to the sector. Regulators around the world have warned that the move could lead to greater controls and tougher regulation to protect consumers.
Final thoughts: invest in bitcoin but not as an investment like trading stocks or forex, invest in bitcoin from the perspective of buying and holding onto the currency of the future. It is clear that cryptocurrencies are not going anywhere anytime soon, and will in fact (hopefully) slowly take on a more stable presence in our economies. You don’t want to miss the boat when that happens.