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Cryptocurrencies Slide Sharply as Edgy Investors Scale Down Investments

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Written By: Alessandra Yuan – Forex Focus

It’s been the year of the bitcoin bloodbath, as crypto-carnage reached new highs with bitcoins and the other well-known names in digital-currency markets extending a freefall. Likewise, Ethereum, Litecoin, Bitcoin Cash and Ripple followed a similar pattern in February of this year.

Bitcoin, which slid as low as $5,920 in early February, rebounded in the second half of the month, surging above $10,000 after the governor of the Financial Supervisory Service in South Korea announced that the government will support the cryptocurrency if certain trading conditions are met.

What drove the cryptocurrency slide?

The trigger for the biggest market slide for cryptocurrencies in over a year was a medley of factors. There were concerns over regulation, a Facebook ad ban and worldwide investigations into the cryptocurrency tether. These hurt market sentiments, leading to a selloff in cryptos across the board. With the bitcoin mania looking to be all but over, prices plummeted amid fears that cryptocurrencies had gone kaput! In complete contrast, bitcoin and other digital currencies surged to record highs in December last year, alluring a large number of high-net-worth and retail investors, some of them even selling nonperforming assets such as gold to capitalize on the mania.

Between growing fears that markets are being manipulated and digital currencies are vulnerable to theft, countries across the world have begun taking action. China and Russia have opposed cryptocurrencies, while Japan has embraced them. India remains skeptical, and if the recent slide is anything to go by, countries around the world will be joining in.

Bitcoin has been extremely volatile over the last few months, with unprecedented selling in February after years of stability and prosperity. Other cryptocurrencies have fared no better. The world’s third largest digital currency, Ripple, fell by as much as 30 percent within a span of hours on the day of the bloodbath, February 2, and every other major cryptocurrency followed suit—according to data from the official cryptocurrency site CoinMarketCap.

The bigger picture

Looking at the long-term picture, cryptocurrencies have generated positive cash flows for a number of years now. Bitcoin, for example, was up 729 percent in 2017, and the current prices were last seen in November before a major price surge in December. The plunging value of digital currencies has led to a drop in the number of investors buying into its growth story. February’s plummeting values marked the first time that the price had dropped since November, when the bubble started to inflate.

Bitcoin bandwagon losing traction?

ETX Capital’s senior market analyst Neil Wilson surmised that the “wheels are coming off” when it comes to the bitcoin bandwagon. With intense selling pressure, there’s “nothing but bad news for bitcoin bulls”, Wilson added. However, the volatility is no secret. In fact, Lloyds Banking Group PLC went to the extent of banning customers from purchasing bitcoins with credit cards amid concerns that cryptocurrency markets are all set for a major downturn. The bank is also the first in the United Kingdom to ban bitcoin. The digital currency was down 50 percent at the end of January of this year, from the all-time high of $19,460 seen on December 11 of last year, as worries about a clampdown on digital-currency traders by regulators escalated.

Economists predict bitcoin crash imminent.

In February 2018, renowned economist Nouriel Roubini, who also predicted the 2008 financial crisis and recession, said bitcoin was the “biggest bubble in history” and held that the value of the cryptocurrency would plummet “all the way down to zero”.

The Oracle of Omaha, Warren Buffet, also advised market participants against investing in cryptocurrencies, saying that the bitcoin bloodbath is imminent, and it will “come to a bad ending”. Bitcoin’s slide began following reports that investigators across continents were exploring if the surge in prices in previous years was the result of market manipulation. While cryptocurrencies took a beating after South Korea’s move to ban trading in the digital currency, the recent statement by Choe Heung-Sik, governor of the Financial Supervisory Service, was positively welcomed by investors in crypto-markets, driving bitcoin past the $10,000 mark. However, with Russia, India, China and Germany refraining from promoting cryptocurrencies in a similar vein, the recent gains could be a one-off move until some of the other major countries support digital currencies for transactions.

Social media under fire

Facebook also banned all ads luring investors to trade in cryptocurrencies, indicating these are associated with misleading or “deceptive promotional practices”. The move was the result of social media receiving criticism from users about hoaxes and scams on their newsfeeds.

Cryptocurrency on the decline

The cryptocurrency market has been on the back foot since the year started, with trading volumes slipping in Asia and the threat of a regulatory crackdown becoming a major hurdle. Cryptos in India, where trading is generally carried out discreetly, were recently denied the status of “legal tender or coin” after the finance ministry announced it will “take all measures to eliminate the use of these cryptoassets in financing illegitimate activities” or even as “part of the payment system”.

With investigators studying cryptocurrency tether and Facebook ads promoting bitcoin and other cryptocurrencies, which in spite of the ban managed to creep in, investors are nervous about the possibility of a crackdown, which could lead to legal hassles. 

Final word: Still betting big on bitcoin?

With the markets showing slight signs of recovery, non-institutional traders are still banking on bitcoin. But the question remains as to whether the 500-percent upward movement witnessed in the digital-currency markets last year has finished and the present volatile state of the market is the new normal. Given that stabilization has become the new goal of the cryptocurrency market as opposed to massive profits, the probability of investments continuing to flow into these new-age currencies remains a big question mark.

 

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