The cryptocurrency market fall: causes, consequences, prospects
The causes of cryptocurrency market fall: selling of ВТС, kept on Mt Gox , SEC announcements and Binance hacks. Can the quotes go up again and what is to be expected next?
In January, 2018, the cryptocurrency market reached its highest level, increasing investors’ optimism. It seemed that forecasts of $20.000, and then $50.000 for Bitcoin in 2018 will come true. But just in a few days, the market crashed from the top of Olympus down to the levels of November, 2017 and started trading flat. The reason was found almost two months later. Now traders wonder, what to bet on: returning to the former levels or further decreasing. What are the causes of such a fast drop and what to expect in future, read in this article.
Bitcoin flew off but promised to be back
In 2017, Bitcoin price exceeded all the expectations. According to the most positive forecasts, its price should have reached $10,000 by January, but already in January, cryptocurrency community saw the Bitcoin price of $19,000. Traders’ joy and optimism were so enormous that there appeared the following projections: Bitcoin would have grown up to at least $50,000 by the end of 2018. Some people even started comparing BTC capitalization to that of the U.S. dollar, thus, considering Bitcoin limited issuance, calculating its real price. Cryptocurrency fans were already anticipating quick profits from the whole market continuing growth, but what happened was unexpected. Just in a few days, the market cap of 830-840 billion USD crashed by more than twofold, and there has been trading flat in the narrow range of 350-450 billion USD since February.
According to technical analysis, flat is entering its final stage, which should be followed by the levels breakout. It’s just a question, in what direction the breakout will be. Cryptocurrency fans wish to believe that the market will again try to test at least the level of $600 billion (that is, with BTC share of 40-41%, its price can grow up to 14,000 USD). Trading flat can continue for a long time. But there is a pessimistic scenario as well: the breakout will be from above, and there are more than enough reasons for that. About the reasons and whether one can make profits on that, read on.
Japan and South Korea backstab the cryptocurrency market: large players’ games that can crash the market
It has been almost four years since Mt.Gox bankruptcy, but “sword of Damocles” is still hanging over the cryptocurrency market. It is not just hanging over, it is threatening to deal a crippling blow to it.
In January, 2018, total market cap reached its high, but then, it crashed with the same speed. Analysts (according to numerous publications) related the crash to the news from South Korea, where the police and the tax authorities executed search warrants at the largest exchange platforms. The country’s authorities have announced potential measures to strictly limit the cryptocurrency trading, depriving the coins of their main advantage – anonymity. Perhaps, it has also affected the exchange rate, but there is a natural question, why then traders didn’t transfer their money to the exchange wallets in other countries and let more than 50% drop of the whole market occur? May be, the matter is in something else that the mass media don’t tell about.
After Mt.Gox hack, 650.000 Bitcoins were announced to be lost, there is still no information on what happened to the coins. It is a different situation with 200 000 ВТС, which were somehow found. The case of the exchange bankruptcy is still ongoing, but traders have started selling coins only recently. According to the report of the exchange bankruptcy trustee, liquidating its cryptocurrencies, as much as 36,000 BTC and 34,000 BCH was sold from December, 2017 till February, 2018. Moreover, the cryptocurrencies were sold through the exchanges, chosen by the trustee, and, of course, they remain unknown.
There are some of the enlisted cold wallet addresses, which will be liquidated by selling the cryptocurrencies from them (full list is here gaelb.alwaysdata.net/MTgox_watch_CW/index.html).
It is planned to sell 166,000 BTC and 168,000 BCH out of 200,000 BTC and the same amount of BTH.
According to the report (mtgox.com/img/pdf/20180307_report.pdf), the cryptocurrencies were sold by installments
December 18 - 2000 BTC (price fall by 1000 USD)
December 22 - 6 000 ВТС (price fall by 5000 USD)
January 15 - 8 000 ВТС (price fall by 3500 USD)
January 31 - 6 000 ВТС (price fall by 2000 USD)
February 5 - 18 000 ВТС (price fall by 2000 USD)
If we analyze BTC chart and compare it to the report of the trustee, appointed by the Japanese authorities to execute the process of MtGox bankruptcy, we can notice that the sales dates coincide with deep drawdowns. The selling of the last 18,000 BTC seems like a try to earn at least some money on the falling market. After the recent large sale, Bitcoin formed the bottom at the level of about 6000 USD.
It is not difficult to imagine, what will happen to the market if the trustee will sell the rest of the cryptocurrencies, following the principle “better a small fish than an empty dish”. For example, BTC daily turnover in the equivalent is about 520-530 USD on Bitfinex exchange. The cost of 166,000 BTC at the rate of 8000 is 1.328 billion USD. Even partial, step by step, selling off the cryptocurrency can well result in the fast crash of the whole cryptocurrency market. Now imagine, what a huge time bomb it can turn out to be when the sale is joined by other institutional investors. Of course, they are unlikely to benefit from selling off the coins at the lowest prices. So, we can again witness the artificial surge of at least Bitcoin, but it is likely to be short-term, followed by an immediate crash that will cause all the buyers to lose all their money.
Binance exchange hack
Cryptocurrency market problems were enriched by another one. The second largest exchange by trading volume, Binance, was reported to be hacked on March, 7. There has not yet been any certain official information from the exchange representatives. It is only known that API keys were hacked, and those, who were trading with the use of bots. After the hack, users’ bots started selling altcoins and buying the VIA cryptocurrency without customers’ consent. That resulted in more than 1000% growth of the VIA cryptocurrency.
The report about the hack immediately sent BTC down by 10.27%. Then, the price restored partially but failed to break out the resistance level of 9,600 USD. So, the situation again proved technical analysis to be relevant for trading. Cryptocurrency market is falling again now, but it is still likely to restore and stabilize partially.
SEC is going on the offensive
The regulators also tighten the policy towards the only cryptocurrency, recognized as a financial instrument. On March, 7, SEC (The United States Securities and Exchange Commission) announced that if a cryptocurrency exchange offers trading of tokens, that are defined as securities, then the platform “must register with the SEC as a national securities exchange or be exempt from registration”.
According to analysts, Bitcoin drop on the 7th of March results from SEC decision and Binance hack. Even since the market is expected to restore partially, the mentioned news, given as an example, prove that little space for optimism is left in the cryptocurrency market in 2018, and one shouldn’t expect large profits in the long run.
Although the expectations of the whole cryptocurrency market long rise haven’t been met, it is yet too early to give up on the cryptocurrencies. One only needs to get use of the radical changes and change the strategy principle. A strong trend can hardly start in the near future, but the fact that Bitcoin is steadily increasing its share in the total market capitalization proves BTC to be promising. And making profits from volatility is a good short-term strategy. The fundamental factor will be of key importance, and even if the market draws down to the level of September, 2017, it still can generate income.
Another matter that cryptocurrency exchanges rarely let making profits from short positions. Previously, when the trend was mostly ascending, wallets on the exchanges used to be relevant. But at present, when the market is volatile in both directions, and it still may draw down even deeper, exchange traders don’t have an opportunity to make profits from short positions and hedging. Besides, exchanges are often hacked. In addition to the above examples of Mt.Gox and Binance, there are other well-known cases of hacks and bankruptcies:
BTC-E. It used to be one of the largest cryptocurrency exchanges, included in TOP-3. It suddenly became targeted by the FBI. Servers were stopped in August, 2017, and the exchange was shut down. Although it was about moving clients’ accounts to another platform, many problems remained unsolved and the accounts can not be accessed;
YouBit. The South Korean exchange was hacked in April, 2017. At that time, it was not so crucial in the emerging market. The exchange announced its bankruptcy after the second hack in December, 2017;
Coincheck announced the theft of more than $500 million in the NEM cryptocurrency on the 26th of January, 2018. The issue of compensation is still being settled, but while the exchange representatives are blaming each other, nothing improves for investors;
Poloniex, Bitstamp, Bitfinex were hacked at different times. Moreover, it has occurred more than once.
We know that the cryptocurrencies will fall in price from time to time due to the factors, described above. I would like to make profits from the decline, that is, to be able to open sell positions without having an asset and generate income from the price swings not only upwards but downwards as well. Unfortunately, the exchange doesn’t provide such an opportunity. In this respect, brokers have far more appeal now, as they provide an opportunity of margin trading cryptocurrency.
Why speculative trading through a broker? In addition to the opportunity of making profits from selling, I will be glad to wisely use financial leverage. One to three will be more than enough, don’t get too carried away. The leverage will provide an opportunity to reduce the margin and, therefore, have more money to hold the positions opened.
Besides, I, certainly, take into account the case with the trustee, still disposing 166,000 BTC and 168,000 BCH. According to the chart, analyzed in the first part, and if we assume that the trustee will continue selling by installments, the market will follow Bitcoin downwards after a sell, and move upwards when buyers will try to fight off and hold up the price. During the night of 11 and 12 March, buyers held level 8400 and drew BTCUSD price up by 13%. The current situation is a good opportunity to take a different look at the market and make profits from this confrontation.
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