Why Did The Bitcoin Price Go Down By 50% In The First 3 Months Of 2018?
The price of Bitcoin (BTC) rose an unprecedented amount between January and December 2017. Whilst the technology had slowly been assimilated into popular culture, there had still been something of a stigma attached to trading in BTC and other cryptocurrencies, with conventional investors looking at the practice somewhat skeptically. However, all that was to change in 2017, when the price of BTC rose from a still impressive 967 dollars per coin to a quite astronomical ~19,700 dollars at its peak. Those who had for years been preaching the value of BTC investment were suddenly proved more right than even they could have guessed. Casual investors, too, were able to make small fortunes through the dramatic rise and rise of the BTC price.
However, like all good things, this dramatic price rise came to a sudden and dramatic end, with BTC dropping by in excess of 50% between December and March 2018. The neigh sayers who had been preaching hesitancy for much of 2017 smugly declared this to have been a forgone conclusion. However, was this merely a case of the unrealistic BTC bubble popping? Or were there actual market forces that led to this sudden and dramatic change in value?
China accounts for nearly 33% of the total BTC trades. BTC China facilities more BTC transactions than Bitstamp and MtGox (the world’s second and third biggest exchanges) combined! For this reason, what happens in the Chinese BTC market effects what happens in the rest of the world. At the end of 2017, China introduced what has been colloquially referred to as “a ban on BTC”. This is not factually accurate, as it remains legal to buy and sell BTC in China. However, in an attempt to limit the exposure faced by Banks to the volatility of BTC, the Chinese central bank introduced a ban on banks providing funding for and being third party to BTC trades. Misreporting of the situation caused a panic that China was banning BTC trade, which led to many panic sales. Additionally, those parties with BTC positions tied to banks in China were forced to sell. This increased activity and instability by the massive market leader in BTC trading had a large-scale effect on the global price of BTC.
South Korean BTC Regulations
Depending on the reports you read, South Korea ranks as between the third and fourth biggest market for cryptocurrencies, with BTC trading forming a sizeable chunk of that. Despite its relatively small population size, South Korea has had a significant effect on the global BTC marketplace. It is estimated that South Korea currently houses 12-15 cryptocurrency exchanges, with the most well known being Bithumb, Coinone and Korbit. The reason for this is that the demand for cryptocurrency, per person in South Korea, dramatically dwarfs anything that is seen in the rest of the world.
As a result of this demand, BTC has traded historically at between 20 and 30% higher than elsewhere in the world, with the demand spiking in July 2017 after service providers were permitted to accept BTC as legal tender. However, there has long been a fear that the demand in South Korea was leading to unchecked speculation on BTC, which could have had disastrous effects on the economy. Additionally, South Koreans were concerned at the anonymity provided by BTC exchanges allowing the currency to be used to fund illegal business ventures and criminal syndicates. Finally, rumors of North Korean hackers targeting BTC exchanges in South Korea, as well as the growing belief that heavy speculation was creating a potential bubble in South Korea, led to the imposition of stricter regulations in the territory, including the imposition of 24.2% taxation on BTC income, the banning of opening incognito digital wallets to trade BTC and a ban on minors trading in BTC. These regulations led to several exchanges being shut down, which had a significant effect on the global BTC market.
It also didn’t help when in January Coinmarketcap, the world’s most used Global Index, seeing the inflated Korean Bitcoin prices removed Korean exchanges from its calculations without warning causing an overnight dip in prices which lead to panic selling, further lowering the Bitcoin price.
India’s Tax Regulations
Arun Jaitley, Indian Finance Minister, in his budget speech at the turn of the year, confirmed that the Indian government “does not recognise cryptocurrency as legal tender” and will take steps to irradiate its use to fund illegal activities. In February, India also declared that gains from cryptocurrency trading would be subject to taxation. Notices of this were sent to investors in India with record of cryptocurrency involvement. Whilst the actual notices and budget speech comments weren’t that unreasonable, the reporting on the issue created a sense of fear and forbidding amongst the BTC community, leading to some aggressive sales and a further drop to the BTC price.
Following an audit of seven exchanges in Japan, two were suspended – FSHO and Bit Station – whilst five – Tech Bureau, GMO Coin, Mister Exchange, Bicrements and Coincheck – were ordered to increase their security measures and provide a written plan detailing how their security measures would be improved. This followed on from Coincheck announcing a hack with 500 million USD’s worth of cryptocurrency stolen. The organization in question, the Financial Services Agency, announced that other exchanges were also being examined and could be next to be issued with penalties and review plans, whilst the five exchanges under review could be forced to close if their action plans weren’t deemed sufficient. This regulatory control and uncertainty naturally effected buyer confidence in Japan but also affected the confidence in BTC around the world.
MT Gox Auditor’s Large-Scale Sales Of BTC
Mt Got was the most widely used bitcoin exchange in the world between 2010 and 2013, when it was declared insolvent. Its relevance to today’s BTC price comes as a result of one of the trustees for Mt Got making a series of massive BTC sales between 18 December and 5 February, selling 2000, 6000, 8000 and 6000 coins on five astronomical trading days, completely distorting the market and causing the price of BTC to fall almost immediately each time. Whilst the market has recovered somewhat since the last Mt Gox large-scale sale (5 February), these crazy sales have had a big effect.
As you can see, there are a host of factors that took place at a similar time which have all had a detrimental effect on the BTC price. There are even more events not mentioned above, like social media platforms placing a ban on cryptocurrency advertising on their platforms and potential regulations being put in place in the US. The individual effect of each of these events is difficult to determine, but the cumulative effect is clear for everyone to see in the falling price of BTC globally. Whilst the price was certainty inflated at the time it reached its high, the price drop is certainly about more than just unrealistic valuations and comes as a result of stresses on the global market. Once these stabilize, prospects are good that the price of BTC will recover and start to grow steadily again.