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?
- 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?
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.
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?
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.
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?
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