Fears of a crackdown by governments around the world have caused chaos in the cryptocurrency market. With the exception of Tether, which is at par with the US dollar, all other cryptocurrencies are in the red, dropping in value by double digits. As of 14:19 UTC, the total cryptocurrency market valuation had plummeted to $566.2 billion, down 20% from 24 hours earlier.
At one point yesterday morning, Bitcoin had crashed to $536.5 billion, down 30% from its price 24 hours earlier. The price of one Bitcoin was $11,825.70, down 17.27% from its price 24 hours earlier.
At the time of writing, among the top 10 cryptocurrencies by trading volume, Stellar and Ripple have seen the biggest declines, down 26.19% and 25.18%, respectively. As the chart below shows, the overall declines are uneven. Despite today's declines, all three cryptocurrencies are still trading positive relative to last year's valuations.
Government crackdown accelerates stock price decline
Possible crackdowns by governments in China and South Korea, the largest trading venues for cryptocurrencies, have been cited as the main reason for the price drop. South Korea threatened to ban crypto trading last year but backed off on Sunday. But yesterday it was a different story. In a radio interview, South Korea's finance minister said that closing cryptocurrency exchanges is still an option, but that “serious discussions” must be had first.
China has also been cracking down on other venues for digital currency trading after banning cryptocurrency exchanges in 2017. “The government plans to block domestic access to home-grown and offshore platforms that enable centralized trading,” Bloomberg reported, citing anonymous sources. However, the report did not provide a proper definition or examples of such platforms.
South Korea is the third-largest cryptocurrency trading venue in the world after Japan and the U.S. The recent surge in prices of Ripple and Ethereum, the second and third most traded cryptocurrencies in the world, was driven by trading on Bithumb, South Korea's largest exchange.
Kelly Walsh, an assistant economist at Capital Economics, told The Wall Street Journal that the government's move has “clearly spooked” investors. “The more widespread Bitcoin becomes, the more likely it is that we'll see stricter regulation,” she said.
Reminiscing on Bitcoin Price Manipulation
Even though Bitcoin prices are plummeting today, it’s important to have perspective.
A new paper published in the Journal of Monetary Economics reveals how two bots run by one person at Mt. Gox, the exchange that collapsed in 2013, drove the price of Bitcoin from $150 to $1,000 in just two months.
According to the paper, around 600,000 Bitcoins (worth $188 million) were “illegally obtained.” The paper's authors found that trading volume spiked when two bots, Marcus and Willy, were participating in the game. This spike created a virtuous cycle in which other human investors joined in, driving up prices through artificial demand. Exchanges profited by pocketing the trading fees. Not surprisingly, the paper's authors argue that a thin market (or not enough liquidity) made it easier to manipulate.
A similar situation exists today. There are currently 1,385 cryptocurrencies on the market, and trading volumes are subject to sudden rises and falls, even for the most heavily traded cryptocurrencies. Multiple reasons have been offered to explain cryptocurrency price fluctuations, but none of them are coherent. Bitcoin whales and automated bots still exist. More investors, especially institutional investors, will bring liquidity to the Bitcoin market and stabilize the price. Increased government regulation should also help limit the impact of automated trading on Bitcoin price.
Investing in cryptocurrencies and other initial coin offerings (ICOs) is highly risky and speculative, and this article does not constitute a recommendation by Investopedia or the author to invest in cryptocurrencies or other ICOs. Each individual's situation is different, so always consult a qualified professional before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the writing of this article, the author owns a small amount of Bitcoin. It is unclear if the author owns any other Bitcoin forks.
