Bitcoin plunges below the $5,000 level – What is going on?

  • By Harrison Cole

  • December 14, 2018
  • 2:18 am BST

Bitcoin has shed another 12% in value and fallen below the psychological level of $5,000. Last week was a bloodbath, but the carnage continued Monday, not just for Bitcoin, but for all alternative coin systems, as well. For the first time, Bitcoin is actually worth less than it was a year ago. The decline now qualifies for the classification of a “correction”, since the full measure of the fall for the past week exceeds 20%, more like 21%, to be precise. Industry pundits are grabbing for reasons, whether they be technical or fundamental, for why the adjustment came so suddenly and without warning.

Volatility has always been the “Achilles Heel” of cryptocurrencies. Regulators are appalled by prices that gyrate across the map, and institutional investors, the “Big Boys” that manage $250 million portfolios and up, have been reluctant to join the fray without the presence of more price stability. Liquidity parameters are so tight in the crypto world that the mere hint of a large buy or sale could send prices skyrocketing in either direction. Institutional fund managers must have a way to liquidate positions without causing undue price stress in the market.

Crypto supporters have always espoused that institutional buy-in will generate the next asymptotic rise in valuations, but that supposed buy-in to date has been muted and behind the scenes in OTC trading with trusted brokers, acting as market makers and intermediaries. These deals never hit the exchanges, where day-to-day transactions are electronically aggregated and reported through approved outlets like Coindesk. In truth, traditional brokers have already ventured into the space, but only to offer their proprietary products or to provide linkages to preferred exchanges.

The investment community did jump into cryptocurrencies in a big way in early 2017. The hype across financial news channels was a siren’s call to arms. The avalanche of newfound demand drove Bitcoin from just under $1,000 to nearly $20,000 in the space of one year. The “bubble” was obvious and could not be sustained, especially since the ability to short the virtual currency had made a giant leap in December.

There has always been the question of what would happen to crypto valuations, if and when professionals that short for a living were able to speculate and influence crypto price behavior. Per one reporter: “Peak prices lined up with the day the Chicago Mercantile Exchange, or CME, introduced Bitcoin futures trading on December 17th. The Chicago Board Options Exchange, or CBOE, opened a futures market a week earlier. Until futures existed it was extremely difficult, if not impossible, to bet on the decline of Bitcoin prices.”

Professional shorting is not the only thing influencing prices. Many analysts also cite the “hard fork” of Bitcoin Cash that took place last week. When there is not unanimous support of a software upgrade in a particular coin system, a “hard fork” occurs, and coin holders and systems infrastructure go in two directions with a net gain in coins issued. In the case of Bitcoin Cash, we now have “Bitcoin ABC” and “Bitcoin SV” going forward. A degree of uncertainty also follows each “hard fork”, such that fearful investors, not knowing what will happen next and suspecting the worst, immediately exit stage left.

Lastly, there have also been several disconcerting rumblings from the regulatory community over the past week, each casting doubt upon the future of cryptocurrencies. Are these over-the-top public comments just petty resentments that refuse to dissipate or are they real, concerted effort to put cryptocurrencies in their place, once and for all?

Regulators, i.e., central bankers, have always found that anything to do with a currency in their backyard should be controlled and owned by them. The latest attacks, however, have a European origin. Christine Lagarde, the chief of the IMF, recently espoused that cryptocurrencies might serve developing countries well, but only if created and operated by the local central bank.

Benoit Coeure, a member of the European Central Bank Executive Board at the Bank for International Settlements in Basel, remarked to Bloomberg last Thursday: “Bitcoin was an extremely clever idea. Sadly, not every clever idea is a good idea. In more ways than one, Bitcoin is the evil spawn of the financial crisis.” He went on to repeat a quote from Agustin Carstens, the head of the BIS, that Bitcoin is “a bubble, a Ponzi scheme and an environmental disaster.” Jamie Dimon, the CEO of JPMorgan Chase, has made similar comments in the past.

As noted, uncertainty breeds fear, and fear leads to rampant selling. A small minority of analysts might also view this sell-off as a move by large investors to clear the market of “weak hands”, drive prices extremely low, and then scoop up bargains before the big fundamental move upwards. If such is the case, then Bitcoin has come of age. Similar tactics such as these happen in financial markets all the time. Why not with cryptos, too?