In the last month, instead of rocketing to new highs as many expected, Bitcoin and the entire cryptocurrency market plunged. Today, prices are still down significantly from where they began the year, with Bitcoin falling below $4000 for the first time since November 2017. In case you’re just catching up on all things crypto, here’s what you need to know: Over the past few months, nearly every single cryptocurrency in existence has taken a hit. Many of these digital currencies have fallen by more than 50% from their peak values—and in some cases even lower than their initial ICO price points. So why is this happening? Let’s take a look at some of the factors at play here…
What Caused the Bitcoin Crash?
A confluence of factors has contributed to the recent crash, but the most prominent are: - Commodity Markets and Bitcoin Price Cycles: Prices for commodities such as oil, gold, and other resources are historically cyclical. This pattern is also true for cryptocurrencies. When the market is experiencing strong bullish sentiment, it becomes overstretched, leading to a downward correction. - Bitcoin’s Upcoming Soft Fork: In November, the Bitcoin blockchain will undergo a soft fork that will trigger a hard fork in December. As investors are aware of the upcoming fork, they are liquidating their Bitcoin in anticipation of the fork — leading to a price drop. - Institutional Investors Shunning Crypto: As more and more retail investors entered the crypto space in the past year, the crypto market became increasingly overheated. Additionally, more and more Wall Street institutions began to invest in crypto. This led to a rapid increase in the market cap of crypto assets — leading to the overvaluation of the entire crypto space. - Blockchain Scalability Issues: As the size of the crypto market cap increases, the transactional throughput of the Bitcoin blockchain increases. This issue has existed since the creation of the blockchain, but it has reached critical mass in the last year as the crypto market cap has increased to over $300 billion. - ICO Scams, Fraud, and Theft: Throughout the past year, a number of crypto projects have turned out to be scams. Scams have also included projects that have used their ICO funds for unapproved purposes, or have mismanaged their funds entirely. - Conclusion: All of the above factors have led to a correction in the crypto market. The correction is likely to last until the next wave of positive sentiment is injected into the market.
Bitcoin’s Upcoming Soft Fork
As discussed above, the impending soft fork of the Bitcoin blockchain in November is one of the main reasons for the recent downward price trend. As investors are aware of the upcoming fork, they are liquidating their Bitcoin in anticipation of the fork — leading to a price drop. At the time of the fork, there will be two coins in the Bitcoin network: the original Bitcoin (BTC) and the new Bitcoin Cash-like Bitcoin (BCH). When the fork happens, all Bitcoin holders will receive an equivalent number of BCH coins. Given the choice between keeping their original BTC tokens or receiving new BCH tokens, most investors are choosing to liquidate their BTC holdings for BCH. Why? Because the price of BCH has seen a significant increase in the past few months, while the price of BTC has decreased. At the time of writing, one BCH token is worth $3400, while one BTC token is worth $4000. Because of this, most investors are choosing to keep their BCH tokens after the fork, and then sell them in the open market — leading to a decrease in the price of BTC.
Institutional Investors Shunning Crypto
As more and more Wall Street institutions began to invest in crypto in 2018, the crypto market became increasingly overheated. The crypto market cap increased by more than $600 billion in the span of just a few months — an astronomically high valuation for an asset class that has very few (if any) use cases or real-world applications. As the market cap grew, many investors began to panic and sell their crypto holdings due to fear of missing out. This led to an increase in the volatility of the crypto market, and also helped to artificially inflate the price of many crypto assets — including Bitcoin. Now that large-scale institutional investors have become more educated about the crypto space, they are shunning it. This has led to many billions in institutional capital being withdrawn from the crypto market. This has resulted in a significant drop in the price of almost every single cryptocurrency in existence — including Bitcoin.
Blockchain Scalability Issues
As the size of the crypto market cap increases, the transactional throughput of the Bitcoin blockchain increases. At the time of writing, the transaction volume of the Bitcoin blockchain is approximately 3.2 million transactions per day. This is up significantly from the daily transaction volume in early 2017, when the market cap of crypto was approximately $20 billion. As the size of the market cap has grown, the transactional throughput of the Bitcoin blockchain has not kept up. This has created a bottleneck in the Bitcoin network, slowing down transaction times and increasing transaction costs. While the number of transactions per day is still significantly lower than credit card transaction volumes, it has grown to a point where it is now difficult to use the Bitcoin blockchain for daily transactions.
ICO Scams, Fraud, and Theft
As more companies have raised funds via initial coin offerings (ICOs) over the past year, many fraudulent projects have been identified. While there are many legitimate projects in the crypto space, there are also many that are fraudulent. The crypto market is largely unregulated, making it easy for unscrupulous individuals to launch a fraudulent ICO — and then disappear with the money. This is a significant problem because most ICOs receive funding from retail investors who are not experts in the crypto space. As more and more fraudulent ICOs are identified, retail investors have become increasingly wary of the ICO landscape. This has led to a significant decline in ICO funding this year — driving down the price of Bitcoin.
Conclusion
Now that the crypto market has entered a bear cycle, what can we expect from the future of this space? While it is possible that the market may fall to new lows before it rebounds, it is also possible that the market has hit a bottom and is ready to begin a new bullish cycle. With the significant correction of the past few months, the crypto market has become more affordable for new investors. Given the massive potential of this space, it is likely that the crypto market will attract new investors and begin a new bull cycle in the near future. In order to survive and thrive during the next bull cycle, it is important to be selective with the cryptocurrencies you choose to invest in. Be sure to do your research on each project to ensure that it is legitimate and has a real-world application. In addition, it is important to diversify your portfolio to mitigate risk. You don’t want to put all of your eggs in one basket — particularly in a space that is as volatile as crypto.