The value of bitcoin has fluctuated wildly over the past week. After hitting a new high at the start of the week of around $ 20,000, it has now lost about a third of its value after collapsing dramatically on Friday. There are several theories as to why this happened.
The most likely factor to bring prices down is that people just follow what everyone else is doing.
Entrepreneur and tech investor Oliver Isaacs said the fluctuations were the result of a “herd mentality” among investors.
“Just as people were worried about missing the climb, the idea that you can actually lose money is also a new emotion that investors are feeling and people, especially retail investors, are maniacally selling on the downside. “Said Mr. Isaacs.
Unlike many other investments, bitcoin is unregulated, so there are no rules in place to stop a sell-off in the event of a market panic.
Flee to safety
Another factor may be that investors are looking to switch to less risky investments towards the end of the year.
Bitcoin whale sells stake
Kerim Derhalli, founder and CEO of financial app Invstr, believes someone with a large stock of bitcoin could have made it available in the market.
“This increase in availability could have driven prices down initially, other holders – especially those who bought at the top of the market – panicked and decided to offload as a result,” Mr. Derhalli said.
Bitcoin also faces stiff competition from other cryptocurrencies, which aim to improve certain aspects of bitcoin.
“Much of the capital is shifting from bitcoin to alt-coins. Companies like Verge and Ripple saw cryptocurrency values rise over 400% last week, ”Isaacs said.
However, all major cryptocurrencies suffered big losses on Friday.
Will he continue to fall?
It’s impossible to say. Michael Jackson, a partner at venture capital firm Mangrove Capital Partners, believes the price will go up.
“The vast majority of long-term bitcoin holders are still in the money and have shown no signs of cashing in. We are seeing the exit of short-term speculators and we have seen it before,” he said. he declares.
“The fundamentals are still in place and there is no reason the bitcoin ecosystem should not continue to grow,” he added.
Why is bitcoin so volatile?
The highly speculative nature of cryptocurrencies and the fact that they are not regulated by any central bank makes them very volatile.
“While a central bank stands behind and stabilizes traditional currencies, there is no bank, company or government acting as the backbone of bitcoin,” said Mark Ward, head of trade at Sanlam UK .
“This is why the value of cryptocurrencies is so volatile – its value stems from trust in the market that tomorrow bitcoin will not be worthless,” he added.
Investors worried about the security of cryptocurrencies may also be afraid of security breaches.
Cryptocurrency exchanges have also faced a number of hacks in recent months.
North Korea is under investigation for possible involvement in a massive cyberattack on a South Korean bureau de change after hackers stole 17% of its assets.
This sparked a sell-off in bitcoin and other cryptocurrencies, with prices plunging about 15% in Asian trade before recovering.
Bitcoin has recently moved closer to being viewed as a traditional financial investment after the launch of cryptocurrency price futures.
The world’s largest stock exchange operator in terms of value, CME Group, pioneered futures contracts, which allow traders to bet on the future value of bitcoin. Around $ 50million (£ 37.4million) of contracts changed hands in the first three hours of trading.
What will happen in 2018?
Many economists believe that bitcoin remains a major bet and there are fears that the value of the cryptocurrency may plummet.
If you are planning to invest in bitcoin, it is advisable to make sure that you fully understand bitcoin and what drives the price up or down before committing any money.
You should also be prepared to bear the large losses that could arise from the volatility of the cryptocurrency.
Mr Derhalli said that as cryptocurrencies continue to become an asset class in their own right, we should see volatility levels decline.
“However, there is still some way to go, but investors would be wise to look at the long term rather than the short term ups and downs,” he said.
Mr Ward said the future of cryptocurrencies may depend on their approval by central banks and the government and whether the price stabilizes.
“Whether bitcoin drops to near zero, continues to rise like diamonds over the past century, or simply holds its ground once the market finds the level it can tolerate, anyone can guess for now. , but it is certainly one to watch as it becomes better understood by the general public, ”he said.
Mr. Issacs believes prices will continue to rise over the next year despite the massive fluctuations.
“The main factor behind the rise in cryptocurrency prices, especially in recent months, has been a wider awareness and acceptance among the general public,” he said.
“Many well-known companies have started to accept bitcoin as a means of transaction, such as Reddit and WordPress, as well as a number of online retailers, not to mention the patents filed and domain names registered by companies of a billion dollars like Apple and Amazon. “