This was a hard week for investors whether in equities or cryptocurrencies. The total cryptocurrency market lost $18 billion of its value in a matter of hours.
Bitcoin, the world’s largest and most widely owned digital asset began its slide Wednesday evening and fell below $6,200 for the first time in a month, according to data from CoinDesk. Bitcoin has been relatively stable ranging between $6200 and $6500 but this week it ended 5% lower.
Other well-known cryptocurrencies mirrored the plunge. Ethereum, the no.2 by market cap down 12%, XRP was 18% with Bitcoin cash and EOS down 14% and 10% respectively according to Coin Market Cap.
The total market capitalization for cryptocurrencies was $201 billion on Friday, down from $219 billion on Tuesday; a far cry from crypto’s $820 billion peak in January.
So, what caused it?
Classic rumour
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The sell-off began after rumours that cryptocurrency exchange Bitfinex, one of the largest, most influential and respected exchange, was going to suspend all deposits from fiat currencies, according to Brian Kelly, founder and CEO of BKCM.
“That spooked investors a little bit — it was a main cause of the downdraft but we’re seeing prices mostly back to normal,” Kelly said. The exchange quickly posted a response to the reports to pacify investors that “Bitfinex is not insolvent, and a constant stream of Medium articles claiming otherwise is not going to change this.” The sell-off triggered a knee-jerk reaction.
Stock market correlation
Unless you were under a rock you would have seen that global financial markets globally cooled by 5% on average with some majors and indexes even more. 1,300 points in two days in some cases, it’s biggest sell-off since February and cryptocurrency was not immune from investors panic
Joe DiPasquale, CEO of cryptocurrency fund of hedge funds BitBull Capital, said the uncertainty around stocks bled into cryptocurrency markets.
When we saw equity markets crumble, there was some fear in the cryptocurrency market as well,” he said. “I think there was an initial jolt due to larger market activity and the sell-off.
We covered it this week in 8 reasons why the stock market fell, check it out for more information.
Worry about regulation decisions, or lack of them
Many bullish cryptocurrency enthusiasts hoped 2018 would be a year that regulators warmed up to the idea of professionalizing the trading of digital assets through new financial products like exchange-traded funds. However, this was not the case. It’s mainly been delays – the U.S. Securities and Exchange Commission has rejected several ETFs including a highly anticipated one planned by the Winklevoss twins. Other countries, including China, have come down hard on cryptocurrencies although The UAE and Switzerland have tried to become hubs. As the profile has been raised since January, this year has been marked by high-profile hacks on cryptocurrency exchanges as well as a number of scams of fake initial coin offerings.
Top financial players negativity
It’s nothing new and really something that happens on a daily basis when someone wants so publicity. The last 3 months, there has been a lot of negative sentiment toward cryptocurrencies from important financial institutions and major figures. However, it doesn’t come much more significant that the International Monetary Fund (IMF) “Continued rapid growth of crypto assets could create new vulnerabilities in the international financial system,” the International Monetary Fund stated
Nouriel Roubini, an economist who predicted the 2008 financial crisis and a long-time cryptocurrency bear, sounded a fresh warning about digital coins.
“Crypto is the mother or father of all scams and bubbles,” Roubini told the U.S. Senate Committee on Banking, Housing and Community Affairs at a hearing at the end of last week.
Specifically about cryptocurrency, the International Monetary Fund (IMF) warned this week the bitcoin and blockchain boom facilitating the “rapid growth” of cryptocurrency assets could create “new vulnerabilities in the international financial system”.
In a key report published on Wednesday, the Fund said: “Cybersecurity breaches and cyber attacks on critical financial infrastructure represent an additional source of risk because they could undermine cross-border payment systems and disrupt the flow of goods and services.
AI and fake trading bots
There has been a trend in the financial markets whereby after a poorly worded RNS, short and sudden swings in stock prices occur; often attributed to trading “bots” scanning the internet, which initiate trades and cause a domino effect on the price. I.e. a mention of a placing or fundraise from the past may tell the bots one is on the way and a large sell of initiates. This could have happened with smart crypto trader bots. “Whales” (holders of huge amounts of cryptocurrency) can also cause price fluctuations with this method or if they have been spooked themselves, as they buy and sell amounts so vast they impact the whole market rate.
