November 22, 2018 | AtoZ Markets
Bitcoin has dropped further this week to hit $4000. Though price has bounced back to $4500, what might be responsible for the bearish move this week?
From a technical analysis perspective, Bitcoin was expected to fall after completing a bearish triangle pattern. The long-expected bearish breakout happened last week as price quickly fell by 18% to trade below $5800 the first time this year. Other cryptocurrencies, except Ripple, fell in near measures. This week, price continued downside, approached $5000 and dropped below it to hit $4000 in another 25% slump. Ethereum, Litecoin and many others also went southward to hit their respective fresh lows for the year. Though some suggested price would stay above $4400 and recover to $6000 but all that are not happening yet. Aside the technical forecasts, there have been a lot of theories floating around lately that were attributed to this price fall. Here are some of them:
Drop in mining operations
Bitcoin miners are running into losses as BTC value refused to rise above the supposed 'breakeven' price. On Bitmain's S9 mining machine, miners will be at breakeven if Bitcoin trades at $7000. Prior to the fall from last week, Bitcoin stayed consistently between $6000 and $8000 for many months. At that price range, miners might have still remained in the business with the anticipation that price would eventually hit above. One would have expected mining operations to have dropped at that price. At the current price, according to this estimate, miners are running into losses already.
Tether and Bitfinex Scrutiny
One of the many reasons attributed to this price drop is the recent problems with Tether. Tether is a cryptocurrency, created by Bitfinex (a cryptocurrency exchange firm) and is supposedly backed by the US dollar. For a long time, analysts have suspected foul plays by investors on Bitfinex who have been artificially inflating Bitcoin prices during the bubble period. Their activities were suspected to involve buying and selling of cryptocurrencies to create the illusion of activities. This activity also known as 'Pump and Dump' was replicated in other smaller Cryptocurrencies. On Tuesday, Bloomberg reported an investigation by the Justice department on Bitfinex and Tether ltd, to know whether the dramatic rise in the prices of digital tokens was propelled by actual demands and not some manipulations with Tether. With threats from regulatory bodies, many believed 'pumping' activities couldn't hold any longer and digital coins and tokens are now falling back to their actual values.
Regulations and Law Enforcement Actions
The cryptocurrency market was largely unregulated. At the beginning of this year, governments and regulatory bodies have swept in with warnings against the market. Those that accepted started coming on with regulation talks and looking into the activities of the market to deal with ICO scams, price pumping scams etc. Some analysts have therefore attributed the year-long decline to the effect of regulations and law enforcement actions. Recently, aside the Justice department's look into the activities of Bitfinex, the SEC on Friday, fined two Crypto firms - Airfox and Paragon for failing to register their initial coin offerings (ICO). The two companies have also been mandated to allow investors to retrieve their funds after the $250,000 fine. There have been reports of ICO scams as Satis Group, an advisory firm, estimates that 85% of ICOs are scams. Additionally, more than half of cryptocurrency companies have been found out to fold up after four months of offering their ICOs.
Bitcoin Cash Hardfork Problem
Divisions within the Bitcoin community have surfaced in the past few years. Some believe this could have contributed to 2018 sell-off. Bitcoin cash was created in 2017 to solve some of the problems identified with Bitcoin. Bitcoin can only process few transactions per second and that triggered some factions of the community to create a more efficient alternative version named Bitcoin cash (BCH). BCH was created to handle more transactions through a process of upgrade called 'hardfork'. BCH went through a 'hardfork' last week but many believe the complexities and divisions in the community might be discouraging to investors and could have triggered a sell-off.
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