Bitcoin drops below $8,000. Why are cryptocurrency prices falling?
Short answer: They have no reason not to. Long answer: Margin hunting and unmet expectations.
Consensus New York is widely regarded as the biggest cryptocurrency conference around, and in previous years it's been clearly associated with rising prices. But the bounce didn't eventuate this year. On the contrary, prices dropped throughout.
Bitcoin, as the overall market barometer, gives us a solid look at the state of the cryptocurrency markets.
Recent movements are also fairly revealing, according to prices from CoinMarketCap and LiveCoinWatch.
On the Friday, before the weekend preceding Consensus, a heavy hand dropped on the market and quickly pushed prices from over $9,000 to well in the $8,000 range. Similar sharp drops punctuated the weekend, but generally prices were trickling upwards aside from those sharp drops.
Monday then saw an enormous drop, from about $8,700 to $8,400, which bounced back up at the end of the day.
7-day bitcoin prices
These sharp price movements continued throughout the week, and a look at the last 24 hours at the time of writing, which saw bitcoin decline to the $7,000s, shows a similar trend of big dumps.
24-hour bitcoin prices
It's not possible to say with certainty what's happening, but it looks like someone's showering large amounts of bitcoin.
One of the more popular opinions doing the round might be that the sale of enormous amounts of Mt Gox bitcoin are wiping out the market floor. This is probably not the case. The Mt Gox trustee has recently reiterated that he's not selling the coins on the open market, but is instead selling them over the counter to avoid affecting market prices.
But the mere spectre of Mt Gox movements is enough to impact market prices, and it's possible that traders are simply stampeding. But this is still less likely than other theories.
The timing of the drop, coupled with the distinct price movements, suggests a deliberate hand on the scales.
Suspected price manipulation has previously dropped, and raised, bitcoin prices. The price trough of last weekend is almost identical to the manipulated-looking price trough on the weekend of 7 April, and the timing – around Consensus – means it would be a very profitable time to whip the markets around.
One of the more likely theories might be that some of the less reputable exchanges are going margin hunting.
The idea is basically to wipe out bitcoin futures traders and pocket their money.
In simple terms, futures trading is essentially betting on future price movements. If you think it will go up you "go long", if you think it will go down you "short". If you're right, you win money and if you're wrong you lose money.
Trading on margin, aka leveraged trading, lets traders magnify their gains and losses.
So you might bet on the price movements of one bitcoin without leverage. If it goes up by $200 in your bet you might make $200 (minus fees, etc). If you trade with 10:1 leverage you might make $2,000 instead. If you trade with 100:1 leverage that would be $20,000.
Leveraged trading is typically funded by trader collateral. So they might put $20,000 into their account for margin trading. This lets them unlock leverage for bigger gains, but also puts them at risk of losing their collateral.
So using the above example, if a trader with $20,000 in collateral goes long on bitcoin with 100:1 leverage, but bitcoin prices drop by over $200 instead, they're said to have blown their margin (because they lost over $20,000), and the account is drained and the bet closed. You can see people blowing their margins in near-real time with useful and delightfully eccentric tools like the BitMexRekt Twitter bot.
Margin hunting is when prices are deliberately manipulated to make traders blow their margins, letting exchanges pocket their collateral.
Disreputable exchanges are the likely suspects because:
- They can see how many traders are going long and short on their platforms at a given time. If the "long" traders blow their margins, the "short" traders make money. So actually profiting from this price manipulation means factoring in both sides of the equation.
- They can more easily manipulate prices on their own platforms.
Consensus might have been a solid opportunity for margin hunting.
The most obvious reason is that the general expectation is that prices will rise during the event, which leads to more traders going long, and fewer going short. A skewed ratio of either kind means margin hunting is a lot more profitable for exchanges.
As such, a large and abrupt price drop, like the one at the start of Monday when Consensus hype was high, could immediately wipe out many of the traders who are going long and let exchanges pocket a lot of money. The sudden shift upwards at the end of the day can then catch the traders going short, as well as the newcomers who started shorting in the wake of the sudden price drop.
The sudden drops over the last 24 hours might be follow-ups as manipulation picks off more margins, including those who think the floor is reached and that it's a good time to go long.
Is that why prices are dropping?
It's not possible to say with any certainty, but some of the factors tie together. Or it might simply be that Consensus, which was widely boycotted as an insubstantial cash grab circus this year, simply failed to live up to expectations. The cryptosphere is in a very different place now than it was a year ago, and there's no reason to expect the Consensus bump to remain the same.
Plus, most of the good news currently buzzing around the crypto space is about widespread institutional acceptance and adoption of cryptocurrency. This has everything to do with the technology, and almost nothing to do with the cheesy Lambo rentals and grubby cash-grabbing of Consensus.
So why are prices dropping? Probably because there's no actual reason why they shouldn't, but the expectation of a rise created fertile ground for margin hunters.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, BTC, NANO