Why Did Bitcoin Fall By 50% And Is It Proof The Bubble Has Burst?
Since its introduction in 2009 bitcoin has rallied on to defy analysts’ expectations who have been preaching of its demise right from the beginning. Bitcoin actually inspired other cryptocurrencies which also went on to thrive, much to the confusion of financial experts.
The naysayers were present from the beginning but not many of us even knew of bitcoin then. In 2017 bitcoin recorded exponential growth and with that astronomical growth came the amplification of doomsday preachers. When bitcoin hit record highs, crossing the $20,000 mark internationally, traditional investors had fits.
That growth and accompanying shock and disgust in established investors thrust bitcoin into the mainstream to a point where most, even here in Zimbabwe have heard about the cryptocurrency. Zimbabweans faced with their own problems (bond notes and forex shortages) flocked to bitcoin to try and preserve the value of their hard earned wealth, completely ignoring successful and famous investors who advised against it.
In the last quarter of 2017, the price of one bitcoin went from just over $4,000 to cross over $20,000. Even the staunchest of cryptocurrency fans thought that kind of growth was unsustainable. That did not stop them from buying the coins however, the opportunity to make a killing could not be ignored.
The year turned and after people recovered from their drunken stupors and hangovers and braced for the perennial January disease, news broke that changed everything in the cryptocurrency world.
Thing is, the price of bitcoin had started falling sharply from its lofty $20,000 on December 17 to close the year at just under $14,000. Those who had joined the bitcoin gravy train as it peaked lost out in that extremely short term.
2018 only brought respite temporarily as the downward trend continued. The price of bitcoin dropped to below $10,000 last week, less than half of its record $20,000 a month prior.
The dip was just what the doomsday preachers needed and even famed investor Warren Buffet chipped in with his two cents, predicting that cryptocurrencies will end badly. As you would imagine, governments also took notice.
Reason for the drop
There isn’t much regulation of bitcoin the world over, mainly because cryptocurrencies are relatively new and are not easily understood. In Zimbabwe there is no law that regulates these coins, all the government could do was advise us to exercise caution when dealing in these cryptocurrencies.
When the value of something which people invested billions in drops by half, governments get the best excuse to step in. South Korea, Japan and China are all reported to be looking to ban cryptocurrency trading. It is news of those impending bans which is believed to have led to the price dropping to below $10,000.
The fear was compounded when France and the United States vowed to investigate cryptocurrencies. The fear is that there could be global coordination on how to regulate them. The way cryptocurrencies work would fundamentally change if governments got involved and so people understandably went on panic-selling sprees, driving the price of bitcoin down in the process.
Officials are expected to debate the rise of bitcoin at the upcoming G20 summit in Argentina in March and will most likely discuss introducing tighter controls.
The fundamentals of cryptocurrencies have not changed but concerns of a global regulatory framework being introduced were enough to scare away the speculators. For those investors looking to cryptocurrencies as long term investments, the price volatility is not a deterrent as they actually expect that despite the trajectory being positive, the price will fluctuate wildly in the shortest of terms.
Buoyed by this loyal and optimistic crop of investors, bitcoin is on a bit of a resurgence. After dipping below $10,000 on the 17th of January, it is currently trading at just over $12,500 on this 22nd day of January.
Will this resurgence be sustained for a prolonged period? Probably not. This doesn’t mean bitcoin is doomed, neither does it mean growth is guaranteed. The Reserve Bank of Zimbabwe summed it up perfectly,
… any person who invests in virtual currencies or participates in any transaction involving virtual currencies, does so at own risk and will not have legal protection from, or recourse against, any regulatory authority.
In Zimbabwe bitcoin has been trading at a premium on the country’s sole cryptocurrency exchange, Golix. The price is equally volatile on the local exchange as it is worldwide. The premium has however fallen to less than the 100% it mostly was to less than 50%. On Golix, one bitcoin can be yours for $18,540.
Golix are planning an Initial Coin Offering meant to raise millions and cannot have these kinds of volatilities changing the public’s opinion of cryptocurrency. What they need is for people to sell houses in order to invest in cryptocurrencies like they are doing elsewhere in the world.
We talked about bitcoin because it is the biggest and best-known cryptocurrency in the world but it applies to other cryptocurrencies. Ethereum and Ripple, the 2nd and 3rd biggest cryptocurrencies have been facing similar challenges.
What do you think about cryptocurrencies? Will they end badly like Warren Buffet predicted or are they a better bet than fiat currencies like the USD? Whatever we think, time will tell.