Cryptocurrency uncertainty causes historic price crash

By Alex Hamilton | 30 November 2018

The price of bitcoin plunged in late November, dropping from $5,500 to a low of $3,604 over the Thanksgiving weekend. At the time of writing it stands at $4,175, which marks a drop of nearly 80% from the cryptocurrency’s all-time high $19,703 in December 2017.

The crash also signifies the largest relative price drop bitcoin has experienced since April 2013, when major exchange Mt. Gox suffered payment capacity issues, and the value of the fledgling cryptocurrency dropped from $256 to $76.

More than $60bn was wiped from cryptocurrency markets altogether. Alongside bitcoin, the next two largest cryptocurrencies by market cap - Ripple’s XRP, and Ethereum, dropped by 35% and 50% respectively, with both hitting their lowest levels since Q1 2017, prior to the bull run which saw bitcoin alternatives rapidly increase in value.

“Speculation, rather than the usefulness of the technology or the underlying asset, is what has mostly been driving price movement since its creation,” said Kevin Murcko, CEO of crypto exchange CoinMetro, in an email.

“Fuelled by media hype and the conviction amongst the public that crypto was a way to get-rich-quick, the asset class rocketed from almost nothing to over $800bn at its peak. That price point, quite obviously, was unsustainable. Crypto prices were determined by financial speculation, and not the efficacy of the underlying technology or business.”

This fresh sell-off has occurred as bitcoin cash (BCH), an offshoot of bitcoin, continues to experience a “hash war”. On November 16, the blockchain underpinning bitcoin cash underwent a split, creating two competing chains.

A split in a blockchain, known as a “fork”, indicates a position on the chain where the community cannot agree on a strategy with which to move forward. A soft fork is created when a new backwards-compatible blockchain is created, while a hard fork creates two distinct children of the original chain. Having two competing forks can result in one becoming more prominent than the other, with this victor emerging as the new default chain.

Murcko added: “Psychology is a factor, which applies to the crypto world as much as the stock market. There’s an old saying on Wall Street that the market is driven by just two emotions: fear and greed. We’re seeing the former now reflected in prices. Unlike greed, fear tends to be rapidly reflected in prices. Selling encourages more selling.”

Concerns caused by the bitcoin cash split led to a sell-off in the market. Traders had two new forms of bitcoin cash – BCHABC and BCHSV. Bitcoin cash experienced triple the normal sentiment volatility at the time of the fork, Joshua Frank, co-founder of cryptocurrency analytics firm, told Forbes.

According to Joe Pindar, director of product strategy at Gemalto, this volatility demonstrates cryptocurrency’s inability to live up to its market potential. “With the declines in Dow Jones and Nasdaq between October 2017 and November 2018, bitcoin had the perfect opportunity to demonstrate its ‘digital gold’ thesis and increase in value – but instead it declined by over 44%,” he wrote in an email. “Fundamentally, many of the claims about bitcoin’s market potential have been shown to have little or no economic foundation; and that is a problem.”

Pindar believes that there is too much focus on “the rising and falling prices” of cryptocurrencies. “There are many examples of how elements are being used to develop new utility tokens and blockchain architectures. Similarly, the architecture of cryptocurrency networks is changing from a naïve, single, flat network with a single foundational cryptocurrency like ethereum and bitcoin, to ones that more closely resemble the commercial banking industry.

“The Cosmos Network, for instance, is using an interconnecting architecture that is similar to the way commercial banks work and offers new opportunities to create utility tokens in the same way commercial banks offer credit to consumers.”

Pindar added that while “the previous generation” of cryptocurrencies are “showing their flaws”, there will be a new breed of models and architectures aiming to build “a more robust future”. “In the same way the 2003 low of the dot-com crash flushed out many dubious companies, companies like Amazon and Google survived, prospered and became essential to our daily lives.”

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