This week Bitcoin reached the lowest point of 2018, at one point trading at $4,037. Most experts and analysts place the blame on the Bitcoin Cash fork, low trading volume, and low liquidty. And to a lower extent on the recent SEC enforcement. The fact remains that regardless of cause, the marketcap lost $60 billion and Bitcoin lost approximately 30% of its value. This loss came as a shock to retail investors who were just getting used to the idea of an imminet bull run. And it leaves everyone wondering where the market goes from here.
As it is common in the crypto space, answers are complex and unpredictable. Before figuring out a possible recourse, the primary cause of the problem must be identified and understood. As mentioned above, there are many possibilities to choose from. But inference on the events leading to this crash shows the weak state of the market. For example, the shorting and Futures contracts at scale dug into Bitcoin’s value and left a hollow facade in its place. Bitcoin is meant to be the standard of value in the crypto industry. Without its value a market collapse is inevitable.
In the weeks leading to Black Monday (Nov 12, 2018) when the drop began, there were worrying indicators of an impending doom. Bitcoin unspent outputs rose 42% indicating that transactions were high but the price didn’t reflect them. This is because they were all conducted Over The Counter (OTC). This stole value from the market and created anxiety and speculation.
As instituional investors quietly and stealthily load up on crypto using OTC brokers, most investors feel cheated. And rightly so. Adding to the problem, a most unnatural stability stayed for over a month, creating a false sense of security. As investors held to their positions, traders were busy shorting Bitcoin and creating buy orders at lower price levels. The lack of trading action and the allure of short term profits in Futures created downward pressure that pushed the market down.
The instability created by the developing Bitcoin Cash drama removed transactions from an already weak trading volume. But more substantially, the sudden and brutal takedown of EtherDelta, Airfox, and Paragon, created the quick implosion of the market. It is possible the SEC waited for the right moment to strike. A time that would best deliver a clear point across to all developers. That the agency was watching and violations would be dealt with thoroughly and swiftly. Investors got the point and sold fearing a government take over of the crypto market. All of this proved too much for a fragile market structure and it finally caved in.
Unfortunately, the sell off only encourages further drops. The market is even weaker now that it was before. And traders that profited by betting against Bitcoin will intend to double up. This means that the same situation that created the collapse is starting again. The only respite lies in the current RSI that shows grossly oversold cconditions. Long term investors are using this as an entry point to obtain long term positions. As a consequence this short period of buying is sustaining the market.
In the long term, the market remains secure; crypto currencies are not going away. But after the SEC flexing its muscle, the question emerges as to whether the market will be free or heavily regulated. And as for the short term, there is a high degree of probability that prices will decline further. The postponement of the launch of the Bakkt exchange until the end of January 2019 seems to confirm this assumption. It seems obvious that the owners of the exchange find prudent to assess the extent the damage and launch under better market conditions. For now, it doesn’t seem things will improve anytime soon.