Latest Bitcoin plunge raises more questions
This week's sudden Bitcoin plunge is raising a lot of questions, with some commentators suggesting manipulation of the digital currency is to blame.
Bitcoin, one of the most popular and oldest crypto-currencies, reached an all-time high of $11 395 on Wednesday. However, 24 hours later, it had lost more than a fifth of its value as it dropped to as low as $9 000.
With Bitcoin's 1 000% rise since the beginning of the year, there have been growing concerns of a bubble burst. The debates rage around the long-term prospects of the crypto-currency.
Reports say Bitcoin's rally on Wednesday generated a surge in traffic at online exchanges that led to intermittent outages. The heaviest selling came amid reports of service outages and delays on some of the largest online exchanges.
It had recovered to $9 500 by the time of publication.
Christopher Grey, co-founder and COO of CapLinked, believes the fall may be the result of market manipulation in the highly-unregulated crypto-currency market.
"The large market fluctuations are driven by people who are using the media to manipulate the prices of various coins for quick profits both up and down, especially because nobody is regulating or watching these markets," Grey says.
"Market manipulation that would be illegal for most other things can be done basically without risk for now in these crypto markets."
Following the Bitcoin's fall, Lloyd Blankfein, CEO of Goldman Sachs, claimed the digital currency was a vehicle to commit fraud.
"Something that moves 20% [overnight] does not feel like a currency. It is a vehicle to perpetrate fraud," Blankfein is quoted by The Guardian as saying.
He said Goldman Sachs did not need to have a Bitcoin strategy, adding the digital currency would have to be a lot less volatile and a lot more liquid to justify closer attention.
For Preston Byrne, an independent consultant, Bitcoin, by setting itself up as a sort of decentralised bank, was creating an unreasonable expectation to its new "depositors" that they will always be able to redeem their assets at par, given a wild mismatch between its $200 billion "market cap" and new investor money - which is clearly well shy of that number.
"This expectation is dangerous as it means, in the event of a liquidity crunch, people will behave not as people necessarily behave when there's a sharp sell-off in a stock, but more along the lines of when their bank's solvency is being called into question," says Byrne.
Meanwhile, Daniele Bianchi, of Warwick Business School who is assistant professor of finance and researches crypto-currencies, says Bitcoin is becoming more like an asset class rather than a method of payment.
He points out this is something the public and regulators should realise to fully understand the price dynamics of Bitcoin.
"In a sign of accelerating demand pressure, the number of active Bitcoin wallets has grown almost five-fold over five years. Similarly, the number of exchanges has been increasing exponentially since early 2017, partly driven by the explosion of initial coin offerings as a funding strategy to set new marketplaces, and partly driven by increasing margins and profitability due to increasing Bitcoin prices.
"Demand pressure is essentially driven by two things. Firstly, the increasing awareness by both the public and investors that crypto-currencies are here to stay, and secondly, the increasing 'professionalisation' of crypto-currency trading."
Local Bitcoin players, on the other hand, expect the Bitcoin volatility to continue for some time to come.
Lorien Gamaroff, CEO of Bankymoon.com, believes it is possible that more value will flow out of Bitcoin and into Bitcoin Cash over the coming months. "This means the price of Bitcoin could plummet as investors shift to Bitcoin Cash."