November has seen the largest declines in market values this year, with major drops beginning mid-month. Bitcoin’s fall to $4,000 puts it down more than forty percent in two weeks. Altcoins have fared worse, with many losing more than half of their value during the same period. In traditional commodity markets such substantial declines are usually caused by a notable event, yet in the crypto space no single factor can be identified as the cause of the present price crash. To get a better understanding of the current situation a number of issues should be examined.
There is no doubt that the well-publicized BitcoinCash hard-fork on November 15th was a triggering event for the sharp market decline. Shortly after the fork, many traders rushed to buy into the new platforms, which resulted in a sell-off of many coins, including Bitcoin. The two new versions of Bitcoin Cash have remained extremely volatile, causing continued concern for the overall stability of cryptocurrency markets.
Although significant, the split of BitcoinCash alone should not have been disruptive enough to cause the sustained drops in prices over the past two weeks. However, on November 14th, a set of Chicago Board Options Exchange (CBOE) Bitcoin futures contracts expired. The expiration date of these contracts has been linked to drops in Bitcoin values since their inception last December. In fact, some analysts consider the introduction of futures trading as the primary cause of Bitcoin’s decline throughout this year.
A third notable influence on the price drops is the rampant trading and speculation that has come to define crypto adoption. More specifically, this year has seen a sharp increase in margin trading, offered on exchanges such as Bitmex and Huobi. This type of speculation contributes significantly to price volatility, as small price moves can trigger large scale buying or selling. The price decline on the 15th activated stop losses for these traders, which began a cascade of more selling, thus further driving down prices, triggering even more of them. Additionally, quite a few large Bitcoin sales occurred on Bitfinex which further depressed prices.
There has also been no shortage of discouraging news, such as the continued delay by institutional investors, rumors of market manipulation, and government hostility. In this environment it is not surprising that many have come to believe that digital currencies will not live up to their bold potential. Other would-be adopters are also likely to be waiting until the market stabilizes, and many cryptocurrency owners have sold to prevent further loss.
Altogether, an important takeaway from the present state of the market is that a substantial amount of fiat sits on exchanges, with traders and investors prepared to buy when confidence is restored. The large-scale drop of the past few weeks is thus not reflective of any fundamental flaw in blockchain technology. On the contrary, blockchain development and implementation is stronger than ever.
Many analysts continue to predict an upcoming bull market across the cryptocurrency space, and given the general nature of the sector, a price recovery could happen very quickly. Long term, the value of cryptocurrencies will not be determined by speculation or manipulation. Rather, blockchains will be underpinned by their utility, and by the ability of their distributed ledger architecture to increase productivity, security, and efficiency. There is thus no doubt that for those who trust in the future of blockchain, the current decline in fiat value is not a cause for serious concern.
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