Why The Cryptocurrency Market Goes Down Every Year

The monthly price collapse in Cryptocurrencies sends plenty of people panicking as they seek answers on the yearly occurrence of the plunge. If you have been a crypto-investor for some time you will understand that it is a trend that usually happens every year and especially in January and February. This is very true mostly in the case of Bitcoin, the world’s dominant Cryptocurrency. Although things may look a bleak at this moment, time always tells how things will evolve. 

Last year, the meteoric rise in Bitcoin made thousands of early investors extremely wealthy. It makes everyone in deep need of a slice of the action. Despite being the planet’s biggest Cryptocurrency, Bitcoin has sent shockwaves throughout the financial market.    

The same is evident in other types of cryptocurrencies and some currencies usually expect much more of a beating than others. Ethereum, Litecoin, XRP have all encountered losses of more than 25%. The same applies to Bitcoin and it is down by 17.35%.   

Experts say that the value lost can be recovered in a matter of days – but does it apply to all cryptocurrencies? Whether the altcoins will bounce back or not remains to be determined. Other altcoins might be linked to Bitcoin in one way or another but they all have their strengths and weaknesses. In this article, we will explain the reason for the decline in prices of cryptocurrencies in the two months and what steps are taken to make things right.   

What Causes The Price Of Bitcoin Down To Two-Month Lows? 

It is not pleasing to look at the Cryptocurrency charts right now unless you are into different shades of the red color. Bitcoin had bounced back up to the $6,400 level at the time of writing from weekly highs that were just above $9,200.   

For the first time since November, the cryptocurrency charts show a massive decline below the $9,000 in Bitcoin. Seeing the charts in red is a sign that most crypto-investors have turned towards the fiat currencies, afraid of swapping into altcoins.   

Does this mean an end for Bitcoin and other altcoins? For crypto-investors? Probably not as it is a trend we have seen in the recent past. Most reasonable crypto-watchers agree that the price was overheated at the height of December’s craze. It only had a single option to dive into the short-term and anyone can guess the longer-term growth of Bitcoin.   

The primary question is what causes the slide in prices? The decline was followed by reports that raised worries about potential price manipulation at a major exchange and increased regulation in India. The digital currency fell to a low around $6,810, in late morning trading. The drop came after comments made by Arun Jaitely, India’s minister of finance raising concerns about the increased regulation of cryptocurrencies in the country.   

On Wednesday, the New York Times also reported an increasing number of digital currency investors who were worried about the price of Bitcoin as well as other digital currencies. It is said that they have been inflated by a cryptocurrency exchange Bitfinex which is incorporated in the price index of CoinDesk.   

The total cryptocurrency market cap at the time of writing weighed in at $340 billion which was down from January highs at $830 billion. Although it was a contraction, it cannot be compared to the low for the last 30 days that came in January 2018.  

The recent concerns around Tether and skittishness around the Bitfinex subpoena are to be blamed for Bitcoin’s current downturn.  Tether factors in as a type of cryptocurrency that is a counterpart to the USD and matches the dollar one to one. It seems new Ponzi Schemes get busted every day throwing more doubt on the credibility of other ICOs and credible airdrops.   

Bitcoin and other cryptocurrencies have been less responsive to positive news during the latter half of January compared to their relative buoyancy that is experienced during the December’s dizzying highs. It is also important to remember that Bitcoin has seen a few mid-January dips before even beyond news cycle price influence. However, its behavior through 2017 certainly broke from any of the seasonal patterns experienced in the past.   

The regulatory interests are what creates a sense of foreboding among enthusiasts of cryptocurrency. It justifies fear for various speculators who have too much to lose. They have a tendency of amplifying each new regulatory revelation even in circumstances where the news is good for the adoption of digital currencies in the long term.   
 

The Impact of Bitcoin’s January Fall 

The January fall in Bitcoin has wiped off about $44 billion in value which marks the steepest monthly fall since its inception into the crypto world. The slide was further extended by the regulatory movements to ban all cryptocurrency trading by the Indian government.   

As it is the case with any investor, no one wants to lose their fortune in a single short after investing too much on the cryptocurrency. It is surprising that Facebook also announced a ban on the digital currency adverts sending financial shockwaves to many crypto-investors.   

Bitcoin dropped below $9,000 in January from its peak of almost $20,000 during the December craze. The price of the currency had surged by more than 900% last year and economists had repeatedly warned of a Bitcoin bubble after the occurrence.   

The latest fall comes after news that the US regulators are investigating one of the largest cryptocurrency exchanges over its links to digital assets. Detractors have the fear that the links to a digital asset could cause an inflation to Bitcoin’s price by billions of dollars.   

Bitfinex exchange and the digital asset Tether are still being investigated by the US Commodity Futures Trading Commissions since at least early December. The main idea behind Tether is to promote the flexibility of trading in cryptocurrencies while preserving the stability of money being held in dollars instead of the digital currencies that are fluctuating rapidly. Users can sell Bitcoins in exchange for dollars through Bitfinex. They can then use Tether tokens to withdraw the cash.   

Multiple critics have suggested that Tether has under-capitalized reserves and does not deposit a corresponding amount of US dollars into the reserves once it has created new tokens. Although Tether states that all its coins are backed by dollars held in their reserve, it is yet to provide compelling evidence that it actually has the reserves.   

There is an unclear relationship between Bitfinex and Tether as they have the same chief executive officer.  Tether has always been pushed hardest by Bitfinex but they are separate institutions having distinct finances. Despite the impact in the fall of Bitcoin’s prices since the beginning of the New Year, there are many expectations that it will come back much stronger than before.   
 

It is also a known fact that every time bitcoin takes a dip it comes back with a tremendous rise in price. Here is a graph showing all the Boom/Bust cycles that happened during the year of 2017.

These drops may look worrisome to some new cryptocurrency investors but for veteran bitcoin holders this is just another drop in a roller coaster full of ups and downs. 

Worries about a Regulatory Crackdown 

The fears about a regulatory crackdown in Asia is the most popular theory among market commentators that are driving the sell-off. This comes amid the concerns of fresh crackdowns on virtual currencies by the Chinese and South Korean government across the globe as they struggle one how they can best regulate Bitcoin.   

The recent days have seen cryptos being held back amid heightening levels of perusal from regulators. It is most notable in South Korea as its government has initiated plans to brace down on virtual currencies trading.    

Apparently, the Ministry of Justice is active on a bill to bring an end to cryptocurrency trading via exchanges. The bill could turn out to be bad news if it is eventually passed in the national assembly the fact that South Korea is the world’s third-largest cryptocurrencies market.   

The uncertainty raised by these concern is weighing on the investor sentiment and has largely contributed to the price fluctuations in January. A similar regulatory movement is also being enforced in Russia and many countries around the world where cryptocurrency trading is at its peak.   

Another reason for the yearly decline in the price of cryptocurrencies in the months of January and February is because of the rumors regarding a complete currency ban. Other rumors have spread in China and South Korea about the prohibition of mining cryptocurrencies because of high electricity consumption. These regulatory pressures lead are the major contributors to the significant fluctuations seen in Bitcoin and other alternative cryptocurrencies.   
 

A Correction That Was a Long Time Coming 

Thomas Bertani, the CEO of a cryptocurrency-wallet company Eidoo, thinks that the market overheating is the biggest factor driving the crash. Huge numbers of new investors poured a lot of cash in Bitcoin from October to December which made it rise by more than 200%. Analysts have also contributed that the rising of Bitcoin during the holiday seasons was as a result of the introduction of new friends and family members to the cryptocurrency market.   

It led to an increase in other cryptocurrencies alongside Bitcoin which created bubble-like market conditions that were unsustainable. According to Bertani, the recent crash is just some little air that comes out of the bubble. The last year saw a hype cycle and a massive growth like before that needs to go back to normal once the recent hype reaches its peak. Most likely, this is what is going on now.   

The hypothesis of South Korea banning cryptocurrencies is just an excuse for the market to rest down a little bit before it can continue with its tremendous growth as a digital currency. Although there are other positions that are being closed up at the moment, the correction is not going to cause a huge negative impact. Investors have high hopes that it will be back to normal and probably much stronger.
 

Why the Correction Is Necessary 

The massive price corrections help to prevent the occurrence of short-term bubbles. There is an optimistic price trend of Bitcoin and other cryptocurrencies since they have always managed to recover from significant corrections.   

This is normally supported by the large volumes and rising demand from investors. The market always needs some time to consolidate. According to Lee, a technological entrepreneur, people need to invest responsibly and be aware of this possibility to avoid a lot of panics.   

What Happens To Other Coins If Bitcoin Prices Fall Suddenly?

The price corrects itself since it is completely based on the free market and also if it has posted major gains. However, we have seen other cryptocurrencies such as Ethereum, Litecoin, Ripple, and DeepOnion have progressed even when Bitcoin continues to slide down further. There is no certain short answer to this question just like every prediction on cryptocurrencies.   

Bitcoin is one of the cryptocurrencies that has gained high popularity worldwide with the increase in its use and as more people realize its utility. Bitcoin is fast and decentralized which allows it to fulfill money transfers. Although its price can drip up to a thousand dollars, it always has the resilience of getting back on its feet and advance to greater heights.   
 

Main Reasons: 

There is a solid reason for the occurrence since Bitcoin is only making inroads around the world and people want to buy more of the coin which increases its price. We can say that Bitcoin’s price is a little inflated at the moment but we all know that the price of Bitcoin is not determined by speculation and trading.   

It is always in an ever-increasing demand as a means of transferring money and it’s a currency that earns the most appeal. Since the world of cryptocurrencies is completely unpredictable, the crypto-investors will continue to deal with the hypothetical situation.   

There are two things that directly affect Bitcoin prices fall or increase. This is because of the increasing interest in other altcoins compared to Bitcoin and the overall attraction of the altcoin world itself. It is evident that the smaller currencies make gains sometimes against the Bitcoin and other fiat currencies.   

This is true for some of the booming cryptocurrencies such as Litecoin, Ripple, and DeepOnion. There are situations when we can see the gains in smaller cryptocurrencies but the price of other cryptocurrencies tend to remain the same.   

The effect keeps balancing itself as investors keep alternating between different forms of currency. Some end up going back to Bitcoin itself. This implies that if Bitcoin prices drop by a significant amount, then one or more alternatives like Ethereum, Litecoin, Ripple or DeepOnion have posted gains against the standard Bitcoin. They can either do it separately or simultaneously.   

If the price of Bitcoin seems to go down with a greater margin then it implies the price of other cryptocurrencies is increasing drastically. This occurs when investors lose their faith in Bitcoin once in a while as they get more interested in the performance of other altcoins.   

DeepOnion is one of the emerging cryptocurrencies that has increased in popularity over other smaller coins as it seeks to address the problems of Bitcoin. The same happens with other cryptocurrencies that have been in great competition with Bitcoin such as Ethereum, Dash, Ripple, and Litecoin. 

• Ethereum 

The price of Ethereum is still linked to Bitcoin and when Bitcoin goes up, Ethereum will decrease slightly until it stabilizes. However, this is not always the case every time Bitcoin experiences a crash. Ethereum can either go down along with it or it can achieve a small gain. Although Ethereum was up slightly at the end of January 2018, it seems to have lost value since the week began.  

• Litecoin 

Litecoin has gone positively vertical this year and it has risen by 7,291% against Bitcoin (1,731%) since the start of 2017. Some investors might have been pushed into becoming more adventurous with the recent surge in interest surrounding cryptocurrencies. Litecoin uses a different mining process that is readily available, unlike Bitcoin. Its memory sensitive type of mining makes attacking it more expensive. The only problem is that it makes the mining process more expensive for its users.    

• Peercoin 

Peercoin uses a clever system that requires the attacker to have a majority of the computing power and to own lots of coins. It makes them very difficult to attack. However, it suffers from the fact that the computing power that defends the currency is smaller than Bitcoin’s. The price fluctuations in Bitcoin can cause Peercoin to increase or decrease by a slight margin.    

• Ripple 

Ripple has seen its price skyrocket in the past and it seems to hold steady even with the fluctuations in Bitcoin. Although it has experienced a slight drift, it still possesses a strong overall performance that fuels speculation as to whether it can compete with Bitcoin at the top of the crypto markets. It was also predicted that by a panel of cryptocurrency experts that it could overtake Ethereum – the second largest cryptocurrency after Bitcoin.    

• DeepOnion 

Crypto-investors find that DeepOnion has much to offer in potential profits as an anonymous cryptocurrency. It has always benefited from the increasing volume that has contributed towards its listing in bigger coin exchanges. A decline in Bitcoin can cause a slight increase in the value of DeepOnion as more crypto-investors explore different cryptocurrencies for potential gain. It is ideal for both medium and long-term traders and the holding time is usually measured in months and weeks.    
 

Why Bitcoin Comes Back Stronger After the Declines 

According to chart evaluations, the price of Bitcoin has always increased by a substantial margin after taking a dive that is greater than 20%. The cryptocurrency posted 61.5% gains in each cycle on average after substantial sell-offs.   

The outstanding number has resulted in an increased desire to ‘buy the dips’ among insiders. This involves purchasing Bitcoin during the lows and then realizing substantial gains as the price continues to increase.   

Two weeks after a decrease in Bitcoin’s price, it gained an average of 28 percent. History indicates that future returns are likely to greater compared to what we have been seeing before. The reason why Bitcoin comes back stronger is that of the growing interest from institutional investors. Every technology that is so disruptive will definitely have bubbles and no cryptocurrency is an exception.   

Despite the consumer fears, experts in the crypto-market have long-term views on the ability of Bitcoin to resurface. Aficionados are aware that holding requires a little patience and resolve. Despite the relatively short history of Bitcoin, most of the believers have pointed out that this currency so far has never failed to bounce back from a hard dip. This makes it a continuous trend over the years as it is known for its volatility.   
 

Why the Value of Bitcoin Is So Volatile 

There are many factors influencing price fluctuations in the spot rate of cryptocurrencies in the exchanges. Bitcoin does not have a generally accepted index mainly because the cryptocurrency is still in its nascent stages as an asset class. However, it is capable if volatility in a relatively short period of time in the form of 10x changes in the price compared to the U.S. dollar.   

Some of the factors behind Bitcoin’s volatility include;  

• Bad press hampers the rate of adoption 

Geopolitical events and statements by governments that cryptocurrencies such as Bitcoin are likely to be regulated tend to scare its users. The use of cryptocurrencies is highly criticized because they are being used to evade tax obligations and to make drug transactions. The value of Bitcoin compared to the fiat currencies drove down the value rapidly. The friendly investors viewed all these events as the market was maturing and this makes it dominant once again after a decline.    

• Little value option to large currency holders 

Its volatility is driven by investors who hold large proportions of the total outstanding float of the cryptocurrency. It is not clear how Bitcoin investors with around $10 million current holdings would liquidate such a large position into fiat without moving the market severely. The currency has not yet hit the mass adoption rates of the market since its volume resembles a small cap stock that would be a necessity in providing option value to large holders of the currency.    

• Variance in perceptions of method of value and Bitcoin’s store of value 

The volatility is also driven by the perception of the currency’s intrinsic value as a store of value and at the method used in value transfer. The function by which an asset can turn out to be useful in the future with some predictability is referred to as the store of value. It can be saved and exchanged for some service or goods in the foreseeable future.  A method of value transfer refers to any concept or object that is used to transmit property from one party to another in the form of assets.    

• News about security breaches 

Such news about security breaches causes a reaction amongst investors of the cryptocurrency. This makes Bitcoin volatile when the community exposes the vulnerabilities in security in an attempt to produce massive responses from open sources in the form of security fixes. Bitcoin’s value reflects the confidence level in the whole protocol design when the community raises voice concerns regarding the software design. It is natural that the value of the coin will fluctuate when people receive news events about security breaches.    

• Bitcoin’s high profile losses 

The losses encountered by Bitcoin and the ensuing news regarding the losses creates a double effect on volatility. The overall float of Bitcoin is reduced which produces a potential lift on the remaining Bitcoin value as a result of increased scarcity. Early adopting firms are always removed from the market as a result of dysfunctional processes and poor management. Some few months later, the entrants learn from their mistakes which helps them incorporate powerful processes into their own operations. This strengthens the overall infrastructure of the currency.    
 

Future Utility 

The reason why most people invest in altcoins is that they have some technical difference compared to Bitcoin. The main idea behind this principle is that altcoins have much of the same utility of Bitcoin in addition to something else. This makes them be more useful than Bitcoin which makes them take over the show.   

The existence of Bitcoin seems to affect the future utility should an altcoin become more useful. There are several ways in which Bitcoin can try to incorporate a similar feature if found useful enough and this tends to conflict with current use-cases of the currency.   

Entrepreneurs have the ability to add similar functionality while trying to earn profit themselves. This implies that altcoins not only compete with Bitcoin but also compete with all entrepreneurs who seek to build something in Bitcoin. Most altcoins have made an attempt to carve out niches for usage.    

Ripple, for example, was originally incorporated as a way of transferring value by banks and other large institutions. Dogecoin was built on transferring value and tipping each other. DeepOnion, on the other hand, was built on enhancing the speed of transaction, providing high security, anonymity, and privacy.  

The competition of altcoins with Bitcoins means that they are competing with its much larger user base, mining operation, and development as well as entrepreneurs and open source projects.   

Futures Lessons   

Futures contract trading dates back to the ancient times and crypto futures are new to the market. Futures markets involve speculators and hedgers. Speculators assume the risk and usually borrow substantial amounts of money to purchase contracts with the hope that it will rise up in the near future.   

Hedgers are always concerned with protecting themselves from price drops in the future. They normally purchase or sell their commodity so that they can lock in a price against the future risks of it decreasing in value.   

Crypt traders and dealers are likely to hedge their positions based on the future market. Bitcoin miners have the possibility of benefiting from futures contracts as they can hedge against their cost of mining and get money from speculators in advance hoping to make a future profit. The launch of Bitcoin futures is likely to attract greater scrutiny from regulators and can cast a shadow on Bitcoin’s fate in the long run.   

The levels of futures trading have not been as high as suggested by the initial flurry of excitement. Ever since the launch of Bitcoin, its volume of trading has been relatively low compared to more established currencies futures.   

Bitcoin might have an additional legitimacy of being traded on futures exchanges but there is an indicative trend in the relatively lower levels of interest from big institutional investors. The advent of futures trading can also inflate the ‘Bitcoin bubble’ further pushing it to a bursting point.   
 

Expecting More Volatility in Future 

Pawel Kuskowski, the founder and CEO of Coinfirm told the Business Insider that the drop was a “correction, a long-expected correction”. This is because it was always going up and the trend had been there for too long. It is just crazy for Ether to jump from $300 to $1,300. Kuskowski never expected any occurrence of a long-term negative effect from the currency sell-off on the sector. However, he thinks this type of volatility is likely to be seen by crypto-investors in the foreseeable future.   

There will be more checks and balances with more and more volatility before it stabilizes. The volatility of Bitcoin and that of other cryptocurrencies such as Ethereum, Litecoin, Dash, Dogecoin, and DeepOnion are to be expected in future. It is very important and part of the journey where they will become a mature asset class.
 

Conclusion 

As we move into next week’s Senate Banking Committee hearings on cryptocurrency, it will be interesting to see what will transpire on the future of the cryptocurrencies. There is a possibility that traders are nervous about the upcoming discussion in Congress. However, there will be a combination of variables from all over the globe to affect the market every day. The meeting can make everything clear for the institutional investors who have always been skeptical about joining the Bitcoin bandwagon. They can expect something that will start the momentum back again. Anyone who considers riding out the current correction could go a long way basing facts on a little historical perspective - even a few months’ worth.