Blood on the streets of crypto or just another day in an emerging asset class?
Many investors are shaking their heads at the continued volatility of the crypto markets. The most recent crypto downturn shows a 22.59% loss in Bitcoin over the last week. Prices are down 41.003% in the last six months.
Let’s look at some theories regarding the recent downtrend.
Bitcoin Cash Contentious Fork
Bitcoin forked in August of 2017, giving rise to Bitcoin Cash. Little less than a year after its creation, Bitcoin Cash just completed a hard fork of its own. For some blockchains, a fork is built into the algorithm. The fork may bring new features onto the protocol, or even protect future blocks from hacking attempts.
There are two types of forks: a soft fork and a hard fork.
A soft fork generally refers to an update in the code/rules. However, even though there is some difference between the two forks, they are compatible. This means the blockchain validity is accepted by both versions of the fork.
On the other hand, a hard fork means the protocol has been changed. Old versions of the protocol/blockchain will no longer work.
Sometimes, a hard fork is “contentious” if two opposing groups of developers disagree on the rules or protocol of the blockchain in question. The Bitcoin Cash hard fork on November 15, 2018 was just that.
The Bitcoin Cash hard fork is between two factions: Bitcoin Cash ABC, spearheaded by Craig Wright and Bitcoin SV, headed by Roger Ver. Ostensibly, the hard fork came about because both sides want to increase the block size. However, a public media circus has demonstrated the fork is more a reflection of a clash of personalities.
The contentious fork has caused a significant price drop in Bitcoin Cash. Because Bitcoin Cash holds the #4 spot by market cap of cryptocurrencies, some speculate the price drop may have been stoked by the contentious fork.
Short-Term Speculators Spooked
In January of 2017, crypto values were at an all-time market high. Many believe the parabolic price movements of late 2018 were caused by investors buying in simply because the price was rising. That led to Bitcoin being overpriced. Crypto economists are reporting that prices correcting now, and could go lower still.
Heart-stopping drops in the Bitcoin price are not a new phenomenon for the nascent asset class. Historically, Bitcoin has had three different crashes of over 80%. The current crypto downturn is clocking in around 75% leading some crypto traders to believe the price could fall further. Long-term investors claim the terrifying price drops are part of what keeps the asset out of reach from anyone who is not a true believer.
No Single Cause For Price Drop
Long-term crypto investors claim there is never a single cause for a bear or bull market. Other contributing factors to the current sell off include a rush back to liquidity. 2017 brought a boom for ICO investors. Many of those early investors are now reaching the one-year term of their investment and therefore liquidating back to fiat.
Additionally, early 2017 investors may begin to sell now because they are reaching their cost basis. Finally, ICO companies who launched last year may currently hold a disproportionate amount of Bitcoin and/or Ethereum. If they need fiat currency as runway capital, they may liquidate their positions back into fiat.
Naturally, a rush to liquidity from multiple sources affects market sentiment and drives price down even more
When we asked our Founder, Jeff Nabers, he gave the following input on the recent crypto downturn:
Some people invested in crypto for no reason other than the price was going up in the short term. Those people no longer have their reason to own crypto and have therefore been selling. On the other hand there are long-term investors who continue to hold because they see real world novel utility and expect an increase in adoption over a multi-year time horizon.