Cryptocurrencies Get Slaughtered But What’s Causing The Selling?
Not long ago the euphoria surrounding Bitcoin and other cryptocurrencies had reached unprecedented levels, with Bitcoin prices touching a $20,000 high and adherents suggesting that a new age of digital currency had dawned.
This week Bitcoin prices touched lows below $10,000, and there was a proportionate bloodbath across the cryptocurrency market space.
So what are the reasons behind the sudden meltdown in the price of Bitcoin and other cryptocurrencies?
Bitcoin’s sudden reversal is largely a product of its own success, with an increasing level of government scrutiny accompanying the growing acceptance and popularity of digital currencies. In addition, the recent release of Bitcoin futures has likely added to volatility in the Bitcoin market.
South Korea has long been a major source of demand for cryptocurrencies. It is estimated that South Koreans make up roughly a fifth of all Bitcoin trading by volume.
It is no surprise, then, that the recent interest in regulating and even taxing cryptocurrency trading in South Korea has contributed to the dramatic plunge in Bitcoin prices. South Korean officials are concerned that cryptocurrencies are being used for money laundering and other criminal activities, and are also concerned that cryptocurrencies present a dangerous speculative frenzy.
Any additional regulations in one of the biggest markets for cryptocurrencies will have a major negative impact on the price of Bitcoin and other cryptocurrencies.
China has looked unfavorably on cryptocurrencies since they became popular means for avoiding tight Chinese capital controls and for the movement of assets gained through corruption. However, China’s regulations and enforcement limiting the trading of cryptocurrencies has been spotty and inconsistent.
Recently Chinese officials have suggested they will be taking a much stricter approach to eliminating access to cryptocurrency trading platforms, thereby eliminating the trading of cryptocurrencies in China altogether.
China is a significant contributor to the global demand for cryptocurrencies and the home of most of the world’s Bitcoin miners. Therefore, a stricter approach to regulation there will drive down cryptocurrency prices globally.
Although no definitive plans to regulate Bitcoin and other cryptocurrencies in Russia are currently in place, some recent comments by President Vladimir Putin indicate that the Russian government does intend to take an active role in managing cryptocurrency trading.
While the exact form that any Russian regulations would take is unclear, the suggestion that some form of regulation is inevitable was enough to contribute the the recent dramatic decline in Bitcoin’s price.
The recent establishment of Bitcoin futures trading has also likely contributed to the fall in the price of Bitcoin. Not only do futures allow for the direct shorting of Bitcoin prices, but the mechanics of contract expiration can also add significant volatility to the price of the underlying security, as futures traders close their positions when their contracts expire.
The recent expiration of some of the earliest Bitcoin futures contracts alongside the decline in the price of Bitcoin was likely not a coincidence.
The Future of Bitcoin’s Price
It is difficulty to say whether this current bout of increased regulations is a sign of what is to come or merely a small bump on the long road to digital currency dominance.
However, the past week has clearly shown cryptocurrency traders that regulations are likely to remain one of the biggest drivers of Bitcoin prices for years to come, and they will be taking renewed interest in tracking the establishment and enforcement of regulations for cryptocurrencies in major global markets.