Last week saw a period of fewer than 48 hours during which over $300 billion were taken out of the cryptomarket. The entire sell-off saw the biggest drop in the cryptocurrency system in recent months and got many on the edge, especially when it comes to altcoin markets.
Now, the process is already known as a crash and many new investors who have been putting in a lot of fiat currency into the domain. Even though it comes at an end of a period of huge market fluctuation, the crash took many individuals by surprise. With this, expectedly, it also produced a substantial loss of investor funds.
At this moment, it looks like the cryptomarket has more or less settled. The downward trend stopped and the remaining investors seem to be out of the strong bearish territory. However, questions are starting about the cause of the crash and the factors that gradually made it happen.
Pump and Know Nothing
The strong growth in prices did not cover only the top digital currencies like bitcoin, which are used by millions for everything from online BTC betting to monetary transfers. A lot of really minor digital currencies were also boosted price-wise, including those which were started as a joke.
Among these, the best example is Dogecoin, an altcoin that was made as a gag with little tech support behind it. Even its creator recently stated that he is dismayed with people putting money into Dogecoin, a cryptocurrency that has a meme dog as its symbol.
This was all a trend of pumping money into the crypto domain with full force by investors who knew nothing about blockchain process or digital currencies. Most of them were taken by the fear of missing out phenomena and being they wielded limited resources, they started looking for coins that were relatively cheap for fiat investment.
But then, the growth reached its peak and the cycle of investment began to switch. The big investors started to pull out their profits and the price charts began falling. The same fall soon turned into a plummet, measuring in double-digit drops for most major digital currencies.
Even bitcoin and ethereum, which were mostly avoided by the newcomer investors ended below their previous big psychological levels – $10k for BTC and 1k for ETH. The air was ripe with the bitter scent of panic selling and no one could ignore the trend.
China and South Korea
Aside from the domino effect produced by panicking new investors, there are also clear geopolitical culprits for the crash. The biggest one definitely comes in the form of the South Korean government stating that new and rigorous regulation of the cryptocurrency exchanges is in the works.
The news detonated like a bomb in the cryptocurrency domain and almost immediately gained traction in the mainstream media, making the effect even worse. The actual news was that a part of the government (the Ministry of Justice) backed this initiative. The move was neither unanimously supported nor easily implemented because it would need a parliamentary vote.
Still, the media was clear about its underlying message – South Korea is banning digital currencies. There were some practical effects almost right away, as some banks decided to stop working with digital exchanges just to be safe. At the same time, China continued to be a source of negative news, following a pattern that presisted for more than 18 months.
After stopping all crypto exchanges and banning ICOs in the country (which impacted ethereum the hardest) in 2017, the news now was directed at Chinese mining companies. The rumors are numerous, but the underlying idea is that mining in China, which is right now the dominant country for this industry, might become complicated. The same could happen, if it ever does, either because of new regulation or because of an end to government benefits the miners get.
The Strain on the Crypto Services
The recent increased interest for the cryptocurrency and its trading led to most crypto service companies coming under serious strain. The influx of new users is constant and the ability to scale up and provide the same level of support is a problem for most businesses.
In this regard, it is important to remember that just two years ago, all of these worked with only a fraction of their current user base. Maybe not all companies put this fact front and center, but there is a certainty that no one planned for this level of expansion back at the end of 2016.
For example, an upgrade in the Kraken infrastructure was supposed to last two hours. Instead, it lasted more than 48 hours and led to plenty of anger among its users.
In fact, for some companies, the strain is so great that they decided to voluntarily curb their own business. This is seen in some exchanges, including the bigger ones like Bitfinex, who stopped taking on new users. From a business perspective, the willingness to cut profits shows that these companies are more worried about the times to come than producing maximal returns.
Even though Bitfinex continued with the new account option, the move shows that companies are feeling the pressure of the unknown. The same is certainly felt by their investors and this probably also played a role in the crash.
A New Ecosystem
However the cryptocurrency ecosystem is presented, one thing is certain – the whole space is a new marketplace. The same goes for eSports, Internet of Things and many novel technologies that managed to spurt a system around themselves.
Like them, cryptomarket lacks complex rules and experience from previous similar situations. Because of this, a combination of factors can easily bring about a crash, as seen recently.
There is clearly no silver bullet that provided the reason for the fall in prices. Instead, the cards just fell the wrong way and this triggered the crash cycle. The same will happen again while the investors can only hope that the support levels will be bigger than they currently are.