Even knowing cryptocurrency's reputation for volatility and wild swings, few investors could have foreseen the plummet that shook all cryptocurrency markets on the morning of Friday, December 22. On the GDAX exchange, Bitcoin (BTC) fell 10%, with an intraday low of $10,400. Ethereum (ETH) and Litecoin (LTC) both fell 14%, and the vast majority of altcoins, like Cardano (ADA), IOTA (MIOTA), and Dash (DASH), also stumbled into the red. From its recent all-time high of $19,892 on December 17, Bitcoin tumbled over 55%. Many altcoins fell even more. Only Ripple (XRP) went unscathed, partly due to its reputation as the most centralized cryptocurrency. Although support levels turned the plummet into a bounce, cryptocurrency as an asset class remains in a downtrend since the weekend.
One explanation is that the cryptocurrency market simply became frothy. With a Money Flow Index (MFI) of about 85 in the 6 hours around the all-time high, Bitcoin was clearly overbought and in need of a correction. But heavy volume of over 102,000 BTC on December 21 indicated that it was not a regular correction, but rather a serious nosedive. Indeed, investors and pundits warned in the weeks before the all-time highs that cryptocurrency was in a big bubble and that a crash was near. Additionally, some traders and investors sold before year's end for tax harvesting purposes.
But perhaps the selloff was not only a technical correction but also a signal that something has fundamentally changed about the cryptocurrency markets.
One possible fundamental reason for the crash is that Litecoin's creator Charlie Lee announced on December 20 that he had sold or donated all of his LTC holdings, which totaled possibly hundreds of millions of dollars. Lee claimed that let go of his LTC holdings to avoid a conflict of interest as Litecoin's founder and influencer. Although he sold after the price dipped from its all-time high, it is plausible that his sale spooked LTC investors and contributed to a greater, continued plunge. Regardless of Lee's rationale, a near-complete liquidation by the founder of a $15 billion cryptocurrency does not inspire confidence in its price prospects.
Another important reason is that on December 19 Coinbase and GDAX added Bitcoin Cash (BCH), a cryptocurrency on a fork of the Bitcoin blockchain that boasts lower transaction fees and faster confirmations. Immediately after Coinbase's announcement, the price of BCH skyrocketed from around $1,000 to $8,000. Allegations of insider trading soon emerged within the cryptocurrency community. Akin to a classic pump-and-dump, BCH then fell 20% to around $3,500 in a mere hour. Coinbase halted BCH trades and announced an investigation. BCH, in line with the broader markets, tumbled to $1,550 and bounced.
In conjunction with Coinbase's allegedly shady practices concerning BCH, , a key supporter and influencer of Bitcoin Cash, gave a passionate interview on CNBC. Also known as "Bitcoin Jesus," Ver explained why he believes Bitcoin Cash's future is brighter than Bitcoin's. Ver envisioned a day when BCH would surpass BTC in price and market capitalization.
The tumultuous cryptocurrency markets have bounced back with positive days but remain down from the all-time highs. Whether the crash is a portfolio-destroying falling knife or surprise Christmas sale depends on risk appetite, financial goals, and ideological views.
The author holds a long position in BTC.
- https://cryptowat.ch/gdax/btcusd/1d
- https://cointelegraph.com/news/crypto-markets-are-broken
- https://www.cnbc.com/2017/12/20/litecoin-founder-charlie-lee-sells-his-holdings-in-the-cryptocurrency.html
- http://www.slate.com/blogs/future_tense/2017/12/20/bitcoin_cash_s_dazzling_debut_on_coinbase_leads_to_an_investigation_into.html
- https://www.forbes.com/sites/johnkoetsier/2017/12/25/alleged-bitcoin-cash-insider-trading-discovered-via-coinbase-with-potential-8x-return/
- https://youtu.be/icxTLRh8qJ8
