Why have cryptocurrency prices been rising?
No one knows, but here's a buffet of theories to choose from.
The abrupt rise in cryptocurrency markets over the last few days started on the exact – to the hour – 12 month anniversary of Bitcoin breaking through the $20,000 range. It's continued since then, leaving many market watchers wondering what's going on and why it's ongoing.
There are no definitive explanations, but plenty of theories.
The news of the day
"There are two news stories people are pointing to that might be helping drive the positive sentiment," suggests eToro senior analyst Mati Greenspan. "Number one is a report from Bloomberg, who have done the research and found that Tether does indeed have the reserves promised."
"The second is an update from ICE, who seems to be all set for their physical bitcoin futures launch of January 24 (pending regulatory approval). The update is from a week ago, but the timing and dates in the note seem to line up with the market movements quite nicely."
It might not be quite as easy as that though. Bloomberg's news didn't reveal anything that wasn't already known, and certainly stopped short of actually confirming that Tether is 100% collateralised. Meanwhile, the markets have been psyched up about ICE's physical bitcoin futures for months now.
The market behaviour
But those factors are perhaps only applicable if you're after a catalyst for market sentiment. The bulk of the actual movements probably comes from people covering shorts, Greenspan suggests. Basically, an initial short squeeze provided a solid bounce in the face of broad pessimism, which caused a sudden upwards spike. This ongoing growth then started freaking out people who are holding outstanding shorts, so they started buying crypto to cover those shorts.
"For those wondering why we're seeing this awesome push from the floor, the only explanation I can give is that this rally is all about short covering," Greenspan said. "Especially after the short squeeze, we saw on Monday, yesterday's action is simply a continuation of that. Markets are made of people and it's likely that most people will be looking to reduce their exposure before the holidays. Over the last few weeks, there have been a lot of high leveraged short positions building up and when those sell positions are closed, it creates upward pressure on market prices."
Others point at the stark rise of Bitcoin Cash this week.
It's ascended by a stunning 117% against fiat in the last 7 days, almost 80% against bitcoin and almost 70% against Ethereum. Following this monumental rise it's now only 95% down from its all time high. Its atypical movements relative to the rest of the markets suggest that the previous drop might indeed have been the result of the Bitcoin Cash hash war, suggests Donald Bullers of Elastos.
"Experts have claimed that the BCH fork caused the crash this fall — while Bitcoin SV has held steady, BCH's significant recovery is likely attributed to the Bitcoin’s regain this week," he said.
It's worth noting that the view that the BCH fork caused the crash isn't universally accepted.
The invisible hand
Anyone looking for a dose of sense in the markets also needs to seriously consider the impact of price manipulation. Rampant wash trading is an undeniable fact of the market, and actual volume across the markets is thin.
This creates an excellent environment for margin hunting, suggests crypto journalist David Gerard. Essentially, whales or even exchanges themselves will manipulate prices up or down with the deliberate aim of liquidating day traders.
"It's a thinly-traded unregulated playground for whales, out to wreck the margin traders. A $400 dip in fifteen minutes is not a “market signal” — it’s a deliberate dump to manipulate the price," Gerard says. "Though there’s still downward pressure on the price — all the suckers from the bubble have gone home, so they're not buying... but the miners still have to sell coins for actual money to pay for their electricity."
It's also possible that miners themselves have been engineering the rise to try and draw some new money in, as the sudden rise came right as many miners and stakers were really at breaking point.
Bitcoin miners have been withdrawing in droves since bitcoin prices hit about $4,500, but while the difficulty decreases may have eased the burden somewhat it still isn't enough with prices falling so fast. A little bit of breathing room right now could go a very long way for miners. Block producers in other projects such as EOS were also starting to feel the icy grip of death, and might similarly buy some time with a price rise.
But it's all just theories, and if you look for patterns you'll always find them. The main question on people's minds might only be what's causing these moves for the purposes of trying to predict what the markets are going to be doing.
The real question then isn't why the markets have been rising, but whether they'll continue to rise or if it's time to go back down.
Most experts when asked for their prediction in this respect answer by saying "ehhhhh" while wiggling their hand, and then shrugging noncommittally.
"Ultimately we are dealing with a new technology and new asset that is highly speculative, illiquid, and elusive, and drivers for its rise and fall is anyone's guess and can be attributed by the media to anything from Federal Reserve's interest rate hikes to SEC regulations to market fever," said Misha Libman, co-founder of the blockchain art lab Snark.art. "The roller coaster volatility that we are seeing today is something we are going to have to live with for a while until we will start using crypto to buy chewing gum."
Bullers is more optimistic.
"Those entwined in the industry are not surprised that markets are beginning to recover, and this move only further demonstrates the need for investors to ride out the storm, not abandon ship at the first sign of crashing," he said. "For those feeling nostalgic ahead of the holidays for the excitement they felt about bitcoin’s boom at the end of last year, keep the faith. The latter half of 2018 was a critical maturation point for the industry, and 2019 will bring with it viable products going to market. Crypto is far from dead."
Snark.art CEO Andrey Alekhin doesn't think it's going to be quite that easy though.
"I don't think that this is the end of a bear trend," he said. "At least not yet. As a result of a steady decline in the crypto markets, many blockchain startups have been cutting down their activity or even leaving the market entirely. We've see that many blockchain developers are looking for jobs now — this was not the case few months ago. Startups liquidating their positions in crypto to survive will continue for some time, as will the bear market."
It's also worth noting that with so much of the crypto industry coming down to the wire in the latest dump, there's probably a good chance more participants will take advantage of this bounce-back to sell some holdings while prices are up. Based on this, one might reasonably expect a rubber band flash crash sometime soon, with prices snapping back down quickly as the selling begins. But even assuming that theory is correct, it's still not possible to put a timer on it.
The snap-back might already have happened by the time you read this, or it might only be a week from now.
The only thing that's certain is that crypto markets will go up and that they'll go down – not necessarily in that order.
- Opinion: With USA and Canada now floating digital currencies, focus should shift to bank overhauls
- Binance Coin ETP now tradeable on Swiss Stock Exchange
- Facebook Libra pushes ahead despite hostilities
- Opinion: The SEC’s Telegram smackdown is a good example of securities laws working as intended
- How Blockstack and Lambda School are fighting toxic student loans