"All This Has Happened Before.." - FAQ on Why the Cryptocurrency Markets are Down
Introduction
One of the questions I have been getting a lot from people who are new to cryptocurrencies and naive to the volatility within these markets is why everything is tanking right now.
In fact my mother who never talks about such things was telling me that she read in the newspaper (they still exist lol) that Bitcoin was going to go bust or something along those lines.
Some new cryptocurrency users have also messaged me on chat, FB and Twitter as they are anxious and wondering if this is the end of "the party".
This is a quick (or as quick as I can make it) explanation for new users about what is happening and WHY YOU SHOULD NOT PANIC.
What is causing this?
There are a number of factors at play but the main one is uncertainty.
The cryptocurrency markets are highly speculative and whilst all markets have some elements of speculation bitcoin and altcoin markets have a much larger degree of speculation within them.
There are multiple reasons for this (such as the relatively small size of these markets). The more important point is the source of the uncertainty:
Why is there uncertainty?
The uncertainty is caused by fears over a couple of Bitcoin scaling solutions (Segwit 2X/BIP 148) that may or may not activate towards the beginning of August 2017.
Why would these scaling solutions cause uncertainty?
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- People are scared that these scaling solutions may "break" bitcoin in some way.
- People are afraid that the community will become more split on ideological grounds and that we may end up with multiple chains i.e. more than one type of bitcoin.
- There is fear that backing the wrong chain may cause people to lose bitcoins if it ultimately ends up failing.
- The last few months have seen very rapid and very large rises in both bitcoin and altcoin prices without (until now) any significant corrections. This creates a background of uncertainty which the scaling issue builds upon.
Why is this making the bitcoin price fall though?
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As a result of the fear and uncertainty people are selling bitcoin to cash out into fiat in preparation of a price fall.
The more this happens the more it pushes down the price.
Why are altcoin prices falling?
Altcoin prices are closely tied to the bitcoin price since in most cases the only way to buy and sell them is via bitcoin.
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This means that as the bitcoin price falls altcoin prices follow too.
In addition many people may be trying to get out of cryptocurrencies altogether until this period of instability passes. They will be selling their altcoins for bitcoin (which will put downward pressure on prices), and then selling the bitcoin for fiat.
They may be hoping that they can then buy back at a lower price and increase their long term holdings when the market normalises and the uncertainty has passed.
Are there other factors involved?
Yes.
Some bitcoin businesses may suspend operations during the period of greatest risk in order to protect themselves from blockchain problems (e.g. chain splits).
I have heard a number of business suggest this although I have yet to see any specific details.
It makes sense of course - you don't want to risk sending or spending money on the wrong chain if a split occurs.
This does add to the feeling of doom within the markets and also further reduces demand for bitcoin during the critical period.
Some businesses may already be ramping down their bitcoin operations in preparation.
Should I sell my bitcoin for fiat?
That is up to you.
If you want to pursue the strategy of selling at the top and buying at the bottom this would make sense.
The problem is the "top" was a few weeks ago and there is no definite way of knowing where the bottom will be.
It is easy to get caught out in pursuing this strategy.
Some might say it is too late for it to work and it may involve a lot of work for very little payoff, particularly if the market recovers more quickly than expected.
Should I sell my altcoins for bitcoin?
Again there is no way to say if this will work in your favour or not.
In some previous crises bitcoin has weathered the storm better than altcoins, in others altcoins have fared better.
The logical answer would be to keep a combination of both so you can spread your risk.
Should I be afraid?
In my opinion, no.
Cryptocurrencies and blockchain are going to replace the current monetary system - I think most people involved see that, the only question is how long it will take.
I am quite confident that once the scaling issues are resolved the bitcoin price will recover (surpassing the $3K ceiling it set before).
When that happens altcoin prices will start following.
Not only that, but we will be in a much stronger position as a successful resolution of the current scaling issues will prove that the community can overcome such obstacles.
I think we may even end up seeing a $5K bitcoin not long after that if things go well.
What if it all goes wrong - will bitcoin and altcoins die?
In a word - no.
It is easy to catastrophize - things could go very badly but the ultimate result of that will be that prices will stay suppressed for a little longer.
It may even benefit bitcoin/altcoin adoption as some of those who felt "priced out" of the market may see it as their chance to get in to the market.
Things are rarely 100% positive or negative.
What should I do then?
I can't answer that.
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Personally I am using the opportunity to buy more of the altcoins I believe in, in anticipation of when the crisis resolves.
I prefer to invest in altcoins as I believe that when growth does return, they will have greater profit potential (due to their lower relative valuations).
Plus as I have stated before I am no good at day trading and prefer to hold long term (for projects which I believe in).
Individual strategies will vary depending on your own personal experiences and situation.
In addition I am doing other things and paying less attention to the markets - why stress yourself out over things that are beyond your control?
Conclusion
There is a good reason for why I chose the title here - not only is it true but it is also a Battlestar Galactica quote - "All this has happened before and all this will happen again".
This is a concept that comes from a variety of spiritual belief systems. One could also look at the occurrence of fractal patterns in nature as an example of it.
This is not the first cryptocurrency crisis and this will not be the last. Each crisis may have its own peculiarities but much of what happens and the way that the market responds will be similar.
I firmly believe that bitcoin and blockchain technologies are the future - they constitute a revolution that will not only change the financial world but many other aspects of life that we may not even be able to envision right now.
Like most revolutions it will not be easy and it will come with some degree of turmoil. That is the nature of disruptive technology.
Those that keep this in mind and refuse to panic will likely do better than those that give in to fear.
As I have said many times before there is no great reward without an accompanying risk.
Thank you for reading
I think this is the fifth major crypto price decline that I have weathered.
The collapse of bitcoin, from $35 to well under $2, was the worst lol.
Compared to that one, this is a cakewalk!
@onceuponatime,
That's very true! People complaining too much about this price drop... Because, they don't know the history :D
Can I screen shot your reply to show to the people who complain about the price drop?
Thanks~
exactly. we had way bigger drops before and we're recovering much quicker nowadays
Great points. I think we would have been due for this pullback even without the scaling issue entirely. As you noted, we've simply gone too far, too fast. With the scaling issue as well, I wouldn't be surprised to see $1000, but I think $1200 might be a more likely bottom. Anything could happen really, calling price points still requires an awful lot of luck.
"I have heard a number of business suggest this although I have yet to see any specific details."
There was a post yesterday about one Bitcoin ATM company, I think in the UK (Shire maybe? I forget) announcing they will shut down operations prior to Aug 1st and "wait and see".
Didn't even notice the Battlestar reference until the last section, oops.
Yes I think we might see a bottom around $1200 or $1000 according to other who know about the TA side of things. Hadn't heard about the ATM company but it does make sense for them.
Still, 50/50 guess so......50% now and hold 50% for your guess. If you're wrong you just be buying in a little late with the other half.
Why not break it down into 10% increments or less and buy over time.
dollar cost averaging is an excellent strategy imo
great strat, thank you
Again fantastic blog post @thecryptofiend.
I would like to describe my strategy. I do not believe that prices have touched the bottom. In other words, prices will fall even more in next days and weeks. So I do not buy any crypto right now, but wait. I will invest in three to five altcoins plus bitcoin.
At the moment I am writing series of texts about cryptocurrencies I believe in. If you are interested where to put money consider following me.
I think a better strategy is to spread out your buys since nobody knows for sure where the bottom will be.
I agree that nobody knows but in my opinion prices are still high. There are many reasons I believe that prices will fall even more.
@thecryptofiend do you believe that all of these influences are already imputed in prices?
That's not what I'm saying. Yes prices probably will fall more but where do you draw the line? That is why I buy in small amounts over time. It is a different strategy but neither is good or bad, you just have different risks.
Agree!
I always tell folks that the alternative to crypto currency is what? So I really feel that after August it's about to be a mad house again. This is a new market though, less than what, 3 years old? Yeah...that's why I really don't listen to all these fake analyzers and crypto currency predictors. The market is just too new to start doing all of that. Now I will say this, the prices are still much higher than they were in April, so even if Bitcoin drops below 1400 along with other coins, technically it is still higher than normal.
Yes and that is also why there is still the possibility for it to drop down to around the $1000 mark.
Whatever it does, I'm with it. I don't plan on going back to the dollar for much investment or o make my money grow.
Lol 3 years old??? What are you drinking cuz I want some... BTC was created 2008 went live 2009. $1 bought about 1000 or so BTC back then on the first exchange.
I stand corrected. So 2010 about...So the market is 7 years old. SO it's relatively new. ANd only since early Feb has really seen this type of growth. It's hard to speculate what the heck will happen in a market like that.
It's still a young market, but many prices are seriously inflated or based purely on speculation. With value investing (the best kind of investing in my opinion), an asset is weighed against its underlying value. To say that the EOS platform is worth $400 million right now... that's tough. When prices reflect so much of future expectations and so little of actual use, that's when its important to be wary. I don't disagree with you regarding more investors getting in in August, but just providing an alternative view.
I always say to people, look at the lifetime price history of Bitcoin. This kind of drop has happened time and time again, and each time, Bitcoin has bounced back stronger. Now that's not to say it's guaranteed to do so again, but it's what's happened every time so far!
Exactly.
Bitcoin has died 140 times and counting..(Bitcoin Orbituary)
time flies ! 140 already !
Exactly!
Amazing article and well explained. You shouldn't have fear with the prices falling now. Everyone is just scared but it will bounce back up again. All around the world people are accepting cryptocurrency's already. Although it's with baby steps, it are still steps.
This is actually a great time to invest en buy some currency's while they are 'cheap'. At the end of the year they will be worth more than they were 1 month ago!
Thanks - yes I agree. Now is a good time to buy but given most people's psychology they will instead be selling.
Thats true. They are thinking short term. But if you think long term you will be a winner. Just like Steem, you have to hold it now and if you are a persona that likes to have it payed out, you can pay it out in a few month's to have a lot more cash!
Exactly.
Amazing commitment, this took substantial time to format and create. Professional grade, not blog grade.
You deserve the professional grade pay out you will get with this work.
STEEM On!!
Thank you!
I think the best option is to stay calm and to wait. After all 1 Bitcoin for example was just 600$ last year, little drops now are not a big deal. ;)
I agree.
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