Bitcoin and digital currency exchanges were recently hit by a slew of negative market events. The total market cap for cryptocurrencies hit $109.3 bln today, a level that we have not seen since Dec. 4, 2017. The current market cap of $109.3 bln is less than half of the record market cap of $327.1 bln. That being said, the market cap of cryptocurrencies has declined more than 50 percent since the all time high on Jan. 6, 2018.
Why did the money leave?
Recently, Bitcoin and digital asset exchanges have been the victim of many negative market events. First, there were rumors that South Korea was banning virtual currencies; then, Tether’s audit was cancelled; and most recently, big banks and credit companies have been prohibiting their customers from buying cryptocurrency with levered funds.
According to CoinMarketCap.com, on Dec. 5, 2017, South Korea was responsible for 20 percent of all bitcoin trades that occurred on exchanges. When one country is moving 20 percent of the market, that is nothing to sneeze at. This became evident around Jan. 11 when rumors of South Korea’s government banning cryptocurrency trading began to circulate. On Jan. 11, the price of Bitcoin dropped from $14,820.10 to $13,909.20, and from that moment on, it has been a downhill trek. Investors may have feared that one of the biggest players in the cryptocurrency market (South Korea) was going to exit the market if a ban were to happen, so investors may have moved their money out of crypto in anticipation of South Koreans’ panic selling on the regulatory news.
Tether is a cryptocurrency that is backed by the US dollar whose supply is supposed to exist in a 1 to 1 ratio with their USD reserves. Tether’s relationship with auditing company Friedman LLP came to an end on Jan. 27, 2018. Tether said that although they are still committed to the auditing process, Friedman LLP’s auditing procedure was not going to be complete within a “reasonable time frame.” When the relationship between Tether and Friedman was severed, it raised eyebrows regarding whether Tether really has the cash reserves that they claim to have. It is likely that investors with money in Tether have been converting their Tether to USD or other digital assets to escape a potential collapse of Tether.
Buying on credit
Recently, big banks such as JP Morgan Chase, Bank of America and Citi have been prohibiting the use of their credit services to purchase cryptocurrency. Companies have been worried that with the severe decline in Bitcoin price, investors who took a levered position and borrowed to buy digital currencies are not going to be able to repay their debts. That being said, it is never good news for investors when well known financial institutions restrict capital flows into a market.
A rough start
Bitcoin and other digital assets have been off to a rough start in 2018. The onslaught of bad news was enough to shock some investors into moving their money out of the market. However, fluctuations like January's price movements are nothing that we haven't seen before — and unfortunately, we are likely to see price movements like this, and price movements that are more severe, again in the future.