Why are cryptocurrency prices falling again?

There are a handful of likely suspects, but typical market movements might be the likeliest.

Major price movements in the cryptocurrency markets are often accompanied by a lot of finger pointing as everyone tries to make sense of them. Today's drop, which has seen bitcoin drop from about US$9,700 to about $9,300 at the time of writing, is no exception.

Some are pointing at Warren Buffet reiterating his widely-known position on bitcoin (that it's bad), or suggesting that Japan is gradually tightening cryptocurrency exchange regulations are driving a loss of confidence.

One of the more likely explanations, driving the drop of Ethereum in particular, might be its ongoing judgment day with the SEC, in which it will defend its status as a decentralised software platform, rather than illegal securities sale. Its odds look good from some angles, but there are no guarantees and cautious speculators might err on the side of caution.

However, one of the more likely explanations is also one of the least satisfying. The slump might just be the market doing market stuff, and people cashing out their recent gains.

The proportion of buy orders in the market, as pulled from a somewhat vague sampling of cryptocurrency trading pairs on major exchanges, shows the sudden tilt of market sentiment.

The buy percentage peaked at about 93% on 20 April, with bitcoin prices at around $8,700. Even as the buy percentage cooled down to the 60% range, prices continued climbing rapidly, leading to a 50%-in-5-days surge for bitcoin, taking it to $10,000. A sudden shift came on 3 May though, which saw it drop from 65% to 44% over the last weekend.

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For many people, $10,000 was probably their mental "time to sell" line in the sand. This might be why prices encountered such stiff resistance at that marker, and people may have noticed a lot of $10,000 bitcoin sell orders cropping up on exchanges at the time.

Those orders weren't necessarily filled, which might exaggerate the buy/sell ratio indicated above. The view might not be as bad as the above picture suggests. However, it also suggests that without some kind of fundamental shift, bitcoin's going to have an extremely hard time getting past $10,000 in the near future. Smart sellers might figure as much, and cash out at $9,000 under the assumption that it's as good as it's going to get in the near future.

This theory is supported by interesting movements elsewhere. Bitcoin's run at $10,000 also coincided with some interesting shifts in bitcoin's coin age proportions. Specifically, it looks like some people were moving a significant amount of coins which hadn't been touched in years. This might be a number of people, or a handful of whales, who missed December's $20,000 bitcoin boat and wanted to take profits at $10,000, or as close as possible, rather than risk waiting any longer.

Will prices go up or down?

OPINION:

The longer a bull run continues, the more fragile and paranoid the markets get. With prices dropping right now, traders seem to be on the cusp of deciding between fight (HODL) or flight (sell). Things could still go either way, but it seems like bitcoin has hit a ceiling shy of $10,000. With the grandaddy coin still leading the rest of the market, this doesn't necessarily bode too well for the cryptocurrency markets as a whole.

At the same time, its dominance seems to be waning. In the last month bitcoin's market share has declined from 45% to about 35%, and altcoins are able to move independently of bitcoin much more easily these days.

Bitcoin's short term outlook doesn't look too bleak though. Many of the keenest sellers, including those who have been waiting years for the right moment, have already hit the button, and there's no reason to expect another bloodbath or ultra-prolonged slump yet. But it's not rosy either, and a non-scientific guess based on a few metrics seems to suggest a few days of sideways prices, and more volatility in both directions from altcoins.

The main takeaway might be that there seems to be no sign of another clean bitcoin rise in coming days. With this in mind, sideways drift can easily turn into freefall, as cautious traders back their money out of the market just in case.

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, BTC, NANO

Picture: Shutterstock