Markets
Cryptocurrency Markets and Bitcoin Price in Bloodbath Over Fear of Government Crackdown
There is a bloodbath in the cryptocurrency markets due to fears of a crackdown by governments around the world. Apart from Tether (which has parity with the US dollar), all other cryptocurrencies were in the red and had lost value by double digits. As of 14:19 UTC, the overall cryptocurrency market valuation has collapsed to $566.2 billion, down 20% from its value 24 hours ago.
At one point last morning, it fell to $536.5 billion, down 30% from its 24-hour price. The price of a single bitcoin was $11,825.70, down 17.27% from its 24-hour price.
Stellar and Ripple were the biggest losers among the top 10 most traded cryptocurrencies at the time of writing, down 26.19% and 25.18%, respectively. The overall declines are not uniform, as the chart below shows. Even with today’s declines, three cryptocurrencies are still trading positively relative to their year-ago valuations.
Government repression spurs declines
The prospect of a crackdown by the governments of China and South Korea, two of the biggest cryptocurrency trading hubs, is being cited as the main reason for the price decline. South Korea threatened to ban cryptocurrency trading last year, but backtracked on Sunday. Yesterday, however, was a different story. In a radio interview, South Korea’s finance minister said that shutting down cryptocurrency exchanges was still an option, but that a “serious discussion” was needed first.
After banning cryptocurrency exchanges in 2017, China is cracking down on other digital currency exchanges. Bloomberg Report cites anonymous sources as saying that “the government plans to block national access to domestic and offshore platforms that enable centralized trading.” But the report fails to provide a proper definition or examples of such platforms.
South Korea is the world’s third-largest cryptocurrency trading location after Japan and the United States. Ripple and Ethereum, the world’s second- and third-largest cryptocurrencies, owe their recent price spikes to trading on Bithumb, South Korea’s largest exchange.
Kerrie Walsh, assistant economist at Capital Economics, told the Wall Street Journal that government moves had “clearly rattled” investors. “The more widespread Bitcoin becomes, the more likely it is that stricter regulations will be applied,” he said.
Flashback to Bitcoin Price Manipulation
Even though the price of bitcoin is falling today, it is necessary to maintain the right perspective.
A new document published in the Journal of Monetary Economics sheds light on how two bots, run by a single person, drove the price of bitcoin from $150 to $1,000 in two months on Mt. Gox, an exchange that collapsed in 2013.
According to the paper, about 600,000 bitcoins worth $188 million were “fraudulently acquired.” Its authors found that trading volumes spiked when Markus and Willy, the two bots, were in the game. The spike brought in more human investors, creating a virtuous cycle that drove up prices through artificial demand. The exchange made money by pocketing transaction fees. Unsurprisingly, the paper’s authors say that thin markets (or markets without enough liquidity) made manipulation easy.
A similar situation exists today. There are 1,385 cryptocurrencies on the market today, and trading volumes, even for the largest cryptocurrencies, are susceptible to sharp spikes and dips. While multiple reasons are advanced as explanations for cryptocurrency price movements, none of them are plausibly consistent. Bitcoin Whales and automated bots are still in play. More investors, especially institutional ones, will bring liquidity to bitcoin markets and stabilize its price. Increased government regulation should also help reduce the effect of automated trading on bitcoin’s price.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the author to invest in cryptocurrencies or other ICOs. Because each individual’s situation is unique, you should always consult with a qualified professional before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of any information contained herein. As of the date of this writing, the author owns small amounts of bitcoin. It is unclear whether he or she owns any other forks of bitcoin.