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Dissecting Bitcoin's latest price drop

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 16 Aug 2018
Bitcoin sank to below R6 000 this week, with the cost of other crypto-currencies dropping by billions of dollars.
Bitcoin sank to below R6 000 this week, with the cost of other crypto-currencies dropping by billions of dollars.

Like any other stock, the price of Bitcoin, the world's most popular digital currency, will remain volatile.

Most South African crypto-currency players agree the recent price drop witnessed by Bitcoin and other virtual currencies will not be a once-off incident as more is yet to come.

This after the price of Bitcoin sank to below $6 000 this week, with the cost of other crypto-currencies dropping by billions of dollars. On Tuesday, Ethereum was also down just over 10% to $253.35.

However, at the time of publishing, Bitcoin was trading at $6 263, with Ethereum slightly up at $283.63.

Nonetheless, Bitcoin is now trading at about a third of its 2017 peak, which saw the crypto-currency spike close to $20 000 in December.

Exchange-traded fund

Shireen Ramjoo, CEO of Liquid Crypto-Money, says various factors saw the Bitcoin price drop this month, as it rallied in July on hopes that a Bitcoin-backed exchange-traded fund (EFT) approval from the US Securities and Exchange Commission would attract new investors.

US regulators have yet to sign off on multiple proposals for such a product, as the decision was delayed until 30 September.

She adds there has been growing concern in the market about initial coin offering projects that raised crypto funds that are now cashing heavily out of the holdings such as Ether, as it is the most popular platform currently for crypto projects.

"As a result of this, it is causing a major panic in the markets and decreasing the price," says Ramjoo. "However, considering the price of Bitcoin last year this time was around $4 500, Bitcoin is still in a profit at today's price if you look at year-on-year growth."

Farzam Ehsani, co-founder and CEO of VALR.com, comments that crypto-currencies, including Bitcoin, are still an extremely new asset class and the world is trying to figure out what they are worth.

According to Ehsani, there are many proponents and opponents, supporters and detractors, good news and bad news (including recent rejections of Bitcoin ETFs) for cryptos.

"And given the relatively shallow markets in crypto-currencies (compared to other asset classes such as forex, stocks or bonds), these widely divergent views lead to a tremendous amount of volatility.

"To be clear though, Bitcoin has experienced much worse sell-offs than the recent bear market of a 70% decline that we have seen over the last eight months. In 2011, we saw a decline of 94% over five months (from $31 to $2), in early 2013, a 75% decline over three months ($266 to $67), and in late 2013 a decline of over 50% over the span of about two weeks. Crypto-currencies will be volatile for the foreseeable future; while that's a problem for many, it's an opportunity for others."

Price fluctuation

Marius Reitz, Luno South African country manager, points out the price of many things, such as stocks, currencies and oil, can be quite volatile; moving a lot against a base currency, such as the US dollar.

"Because the total Bitcoin market is still relatively small when compared to other industries, it doesn't take significant amounts of money to make the market price fluctuate. That said, the volatility of Bitcoin has consistently been going down and it has become much more stable in recent times.

"We've seen many price spikes and we've seen many drops. We spend a lot of resources on educating the market, where we explain the dynamics of markets that are very volatile and can move up or down in a short amount of time."

Reitz adds that in some ways, there is a lesson in this for a lot of new investors; the price is not guaranteed to always go up, it can (and will) go down, too.

"This is why we encourage responsible investing: never invest in something you don't understand, and never spend more on speculative technologies (like Bitcoin) than you can afford to lose."

However, he says as the Bitcoin community grows, increased liquidity, market acceptance and regulation will reduce the volatility of many crypto-currencies.

"We could argue that due to these factors, the market will 'correct' itself with many currencies or projects not surviving in the long run. No one can predict the future price of any asset, not least Bitcoin."

Global perspective

For David Sapper, COO of Blockbid, Bitcoin price factors are both macro and micro environmental, such as global changes in regulation or world events.

For example, the sanctions placed on Turkey recently affected the price of the Lira and drove people to purchase Bitcoin, which could have impacted the price of Bitcoin if Turkey had a larger economy, he explains.

"The negative, fear-inducing narrative we see associated with Bitcoin a lot of the time can cause people to offload through fear. This fear-based selling can certainly lower the market as a whole."

Concluding, Sapper says there is also the effect of the Bitcoin hashrate on the Bitcoin price to consider.

"There's been a 60% rise in the rate over the past few months, which is obviously great news for miners. With less than four million Bitcoins left to mine and the reward being halved from 12.5 to 6.25 per block in May 2020, I'm sure we will see the hashrate continue to increase for the foreseeable future.

"Past halvings in 2012 and 2016 saw Bitcoin's price spike in 2013 and 2017, so even though supply is limited, I don't see miners slowing down anytime soon."

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