Cryptocurrency markets slide to dramatic 2018 lows. Why?
It's a Black Friday cryptocurrency sale.
Cryptocurrency markets have taken several dramatic plunges this week, losing about $60 billion in market cap over the last seven days and with nary a real uptick in sight.
Bitcoin slumped under $5,000 to a 13-month low, Ether moved to about $150 and XRP defied gravity to remain relatively steady even as the rest of the markets were dragged over a precipice. It's now the number two coin by market cap by a decent margin, with a solid $4 billion market cap lead over Ether. XRP briefly unseated Ether as the number two coin in late September, but this cataclysmic shift has given XRP a $4 billion in market cap lead over ETH, which might last much longer.
The question everyone is asking, but no one is answering with any certainty, is why this happened.
The first dramatic drop on 15 November coincided with the arrival of BCH's hash war and an inauspicious Binance maintenance session. The combination seems to have resulted in some pessimism and a sudden sell-off commencing right as Binance came back online.
That initial downturn may have spooked traders and kicked off a stampede out of the markets. But then, after a couple of days of steadiness, the cryptocurrency markets went into another tailspin and no one's really sure why.
Fortune suggests that it might have been a trifecta of the SEC busting another couple of ICOs, the ongoing Bitcoin Cash hash war and Nvidia reporting steeply declining mining equipment sales, but doesn't sound convinced by any of those.
The SEC frequently slaps down misbehaving ICOs, the Bitcoin Cash hash war is entertaining but not especially significant and Nvidia's mining equipment sales have been declining for months. Plus that's almost certainly much more the result of the downturn rather than the cause of it, and GPU crypto mining is an extremely small part of the total cryptocurrency market which, these days, has nothing to do with ASIC-dominated giants like bitcoin.
However, more broadly, the turndown in ICOs might be contributing to the ongoing depressed state of the markets, suggests Bit Trade managing director Jonathon Miller.
"SEC rulings and settlements have impacted markets heavily with ICOs now in 'shut down' and new issuers looking to regulated STO offerings (which are slower and more expensive). ICOs were big drivers of growth especially for platforms like ETH and BTC as a payment method," he points out.
With ICOs now being somewhere between the backburner and the floor, the cryptocurrency markets may have lost a sizable driver of demand, and people might not have accounted for this in their expectations.
It's also a rough time for markets all around, notes Huobi Australia head of legal and compliance Derek Henningsen.
"There are a range of issues that could be impacting on the price falls, such as the recent Bitcoin Cash hard fork and the hash war between competing camps; and the general geopolitical instability impacting on global share markets – historically bitcoin and crypto has been identified as being uncorrelated to movements in share prices; however over the last few months there has been increasing correlation, which may be a sign of more general concerns in the state of the global economy," he says.
Or maybe, Fortune suggests, "the whole thing is a bust." Maybe crypto is just at the end of the road?
It's an increasingly unpopular opinion, going against the general opinion of many other participants. For example, KPMG described cryptoassets as "a big deal" in a 15 November report, and brushed off ongoing volatility as being largely just the murmurings of an immature market. IMF director Christine Lagarde has spoken positively of the diversity cryptocurrencies add to the global financial system and suggested that central banks start exploring their own digital currencies to remain competitive. Fidelity, the giant with trillions under management, continues pouring billions into tech, including a heavy foray into cryptocurrency, and the big banks speak glowingly of the potential of "smart money".
The most likely reason
The most obvious explanation for the downturn is that a lot of people are selling, and not so many are buying – because that's a pretty reasonable thing to do when prices are falling. It's also reasonable to expect this drop to become a self-fulfilling prophecy because technical indicators say further drops may be on the cards, which is a pretty good reason to sell.
So, when bitcoin punctured the $6,000 mark on its decline, this might have been seen by many as a bearish signal, which triggered further selling. Another range was predicted at $5,000 – but bitcoin broached that as well and still seems to be struggling for lift.
"The next logical level of support is at $5,000 but if that doesn't hold, the next logical support level isn't until $3,500. Some analysts are even calling for $1,500," suggested eToro senior market analyst Mati Greenspan.
"Bitcoin collapsed like a house of cards on Monday," Lukman Otunuga, research analyst at FXTM, said to BI. "The weekly close under the $6,000 level was a bearish confirmation of further downside. The cryptocurrency has scope to extend losses if sellers are able to conquer the $US5,000 level."
"The question is where is the bottom? Our market analysis published yesterday shows support in BTC around the 5k USD level, which seems to be holding with institutional interest and STOs coming to market as we see the use cases pick up and drive growth, but this is a slower burn," Miller said.
Business as usual?
It's an alarming descent, and the prolonged drop without even any real recovery attempts is quite a departure. But on the whole, this kind of freefall is still quite well within the bounds of normal market behaviour, notes Huobi Australia head of marketing and communications Lien Truong.
"With all the commotion of what is happening now in the crypto markets, it's sometimes best to look back into history and comparative markets to see what the future may hold. In other traditional financial markets, cycles are a natural occurrence with bear markets taking on average 22 months to recover," Truong says. "The peaks and troughs in bitcoin's cycles itself show the history of when we've time and time again cried Armageddon, with the largest market correction being when bitcoin dropped over 95% from its all-time high in 2011. It has since gone through multiple waves rising and dropping over 50% at least half a dozen time since."
Those who prosper in this kind of market, Truong says, are those who come in with a plan and stick to it. Whether the plan is to take profits at a certain point without getting greedy, sell at a certain loss if needed, or to just sit back and shout sporting commentary at all the red numbers on one's screen, a trader with a plan is less likely to end up somewhere they don't expect.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, XLM and BTC.