The Usual Suspects: Who just brought my bitcoin down?!
Following the famous all-time high of Bitcoin on December 15th, 2017, even the last few people who had been living under various rocks have finally heard about cryptocurrency. Many have decided they wanted in. It seems like the perfect way to get rich – almost zero work included, just buy at the dip and sell at the peak. Why didn't I think of that? I've known all about crypto for ages now! Because as they say, hindsight is 20/20, and while it may not be too late to start investing, you’re afraid that the bubble will still burst.
Regardless of whether you're a seasoned veteran or a noob in crypto, you must be wondering what causes its market fluctuations. Short answer: if we knew for sure, we'd all be rich. I wouldn't be writing this article because I'd be busy hiding this sort of knowledge from the public, faking my own death and moving to the Azores. The long answer is in this article. The terms value and price may be used interchangeably here, both denoting the exchange rate of cryptocurrency in relation to another (generally fiat) currency.
While the selling point of cryptocurrency is decentralization, it would be wrong to assume that governments have nothing to do with crypto price. Every time the (generally Orwellian) restrictions on the use of crypto are imposed in a country, prices change drastically within – the effect on prices in the world depends on which country we are talking about. While we, most likely, wouldn't feel the difference of a tiny country opting out of the game, the prices for locals would skyrocket. On the other hand, China banning Bitcoin has backfired on them, with the prices rising significantly within only a few days.
Obvious though it is, security is a huge factor. When Bitcoin Gold was reported to be compromised in November, 2017, they were lucky to find that their prices had fallen by less than 7%. However, Bitcoin hadn't fared that well in 2014, after the discovery of the Heartbleed bug: prices fell 10% within the next month, and the world held its breath even when the breach was reported fixed. Paradoxically, though, crypto often bounces back or even rises instead of falling at all; with such expensive feedback, security is often improved in a surprisingly short time and leaks are patched – unless the currency has died for good.
More is sometimes less
If you are among the select few lucky enough to have, for example, Bitcoin holdings above around USD 10 million, it may prove challenging to exchange your BTC to a fiat currency without disrupting the market. This is caused by the fact that Bitcoin has not spread enough on the mass market yet – a fact that is likely to be amended soon enough. To a certain extent, this contributes to Bitcoin volatility, and is applicable to other cryptocurrencies as well. Although small, this factor shows the need for the mass market adoption of cryptocurrency through a new lens.
During and after the Mt. Gox, a crypto exchange, fiasco in 2014, prices plummeted in general, not to mention the crash on Mt. Gox itself – hardly unexpected, because who wants to be fooled like that? This goes both ways: Ripple increased in price 37,000% by the end of 2017, thanks to the interest of big-name banks and payment processing services – its target audience. Privacy and security also remained a concern in the eyes of the public, thanks to which in 2017, Monero saw a 2,531% value increase. For a decentralized currency that strives to be from the people to the people, the scrutiny of its audience is bound to be a major, possibly even the largest, factor in its market price.
We have all been there – you see prices increasing, everyone is talking about cryptocurrencies, and you think to yourself, “I really want to be part of this!” Sure, many of us stopped there (because we were scared of losing money), but luckily not all. Many more bought their preferred currency and waited for it to skyrocket. It happened to others, right? But we want quick profits! As soon as the price starts falling, we panic, thinking we won’t be able to break even at the very least, and sell it all. Now we’re comically wiping our brows and thinking we just barely made it out – until next week, the prices rise again...
Still, this sort of dumping can and will drop the prices even further very quickly. A number of cryptocurrencies has died this way, because they can’t make the laborious rise again. And while this is a known factor, not everyone agrees it’s as big as it seems to be.
Luke Martin, blockchain startup investor and advisor, considers the forces behind the market fluctuations more sinister than most. „What if its [sic] not 'noobs' dumping alts, but its [sic] that speculators/MMs are moving their bids lower? Less liquidity from buyers. That would shift down the price of alts too... The market may be smarter than you think“, reads a recent tweet. And sure, if I refuse to pay the price you’re asking for, and the next person does the same, with enough encouragement, you will be forced to lower the price if you still want to sell.
Another noteworthy market manipulation tactic is "pump and dump", a decades-old scheme (made popular by the Wolf of Wall Street where a group of individuals (or, increasingly often, bots work together to buy a relatively unknown cryptocurrency simultaneously, causing the price to inflate through demand – and sell it off to eager investors, who are fooled by the rising price. The aforementioned individuals make off with the money, while the investors are left wondering where the other interested parties are. (Hint: there never were any).
With this breakneck pace of changes, improvements and reactions concerning cryptocurrency, its price will remain volatile at least over the next few years. Singling out the reasons for its fluctuations helps us understand them better, even though no combination of them is a fool-proof cheat-sheet for getting rich on crypto investments. In this regard, cryptocurrency is no different than any other investment that may rise or fall beyond belief in as short a time as 24 hours. The only safe way to hold on to your money is to remain behind the stage and watch without participating. But where’s the fun in that?