For those who have taken an interest in cryptocurrency investment, the last few months have been a whirlwind. Bitcoin rose to staggering highs as we neared the end of 2017, only to come crashing back down at a fairly alarming rate so far this year. And now there’s talk of the price looking north while the stock market plummets. It’s just getting hard to know what to expect, and there really haven’t been clear or sustainable trends.
It could well be that we’re on the cusp of another jump in cryptocurrency prices. Plenty of bitcoin fans and successful investors have predicted that 2018 will be a big year even if there are a few price dips, and they may yet be proven right. If you’re going to trade cryptocurrencies responsibly though, it’s necessary to look back at the two-month crash we saw and figure out what caused it, so you can be prepared for the future.
Historically, one of the things making bitcoin most valuable has been that it is so lightly regulated. For background, in case you’ve never really dived into the cryptocurrency market, bitcoin relies on a peer-to-peer network of nodes to mange and maintain its infrastructure. This is basically a fancy way of saying the bitcoin network maintains itself, and doesn’t rely on any bank, company, or financial institution. Thus, it also isn’t regulated by any of these things – at least not by nature. However, as the calendar flipped over to 2018, we began to hear news about some of the larger cryptocurrency markets (such as China, Japan, and South Korea) tightening regulations. These governments are essentially making it more difficult for people to freely trade cryptocurrency, which appears to have affected global demand and contributed to dropping prices.
Perhaps the most basic explanation of what happened to this market is that a bubble burst – as many had been predicting throughout 2017. There are a lot of over-complicated explanations for this kind of market trend out there, but the general idea is that an asset’s price skyrockets not because of that asset’s fundamental utility or merit, but because investors are getting excited. This kind of jump in price results in a “bubble,” which is fragile and can be burst easily. A lot of seasoned traders have been more or less rolling their eyes at bitcoin anticipating this kind of burst – during which high-volume investors would cash out and take their profits – and it may finally have happened.
The Futures Theory
In the scramble to figure out what exactly happened to bitcoin, many have begun to point to the fact that the futures market was introduced not long before the crash began. Futures trading became an option in mid-December, allowing high-volume investors and hedge fund managers to speculate on the future prices of cryptocurrencies for the first time. Some believe that aggressive selling activity might have been used to drive down the price of bitcoin so that futures contracts predicting lower prices would become winning bets. This is manipulative on a fairly large scale, but it also makes sense and matches the timing of the crash. The good news is that if this contributed significantly to the crash, it doesn’t necessarily mean the price won’t rebound.