Financial market research and analysis

The price of Bitcoin has plunged by over a quarter in the past week. Tuesday (Nov 20^th) saw bitcoin drop another 7% to below $4500, as it extended 14% losses from Monday. The most well-known crypto currency is trading at a one-year low.

While it has been a rough period for long term holders, the volatility has been a bonus for crypto traders willing to trade short.

The recent price action represents a 77% decline from Bitcoin’s December peak at $19,511. That is a bubble popping personified. As the price was running up in 2017, there was clear Europhobia above-and-beyond the fundamental benefits of digital currencies and the blockchain. What we are witnessing is the collapse of that Euphoria.  

We have outlined the following seven reasons Bitcoin and other cryptos likely have further to fall.

• Public awareness

Crypto enthusiasts point to similar percentage declines through Bitcoin’s short history. We would differentiate the recent price drop in Bitcoin from similar past examples. The level of public awareness was much greater this time around.

• Sentiment hit by drop through $6000

Bitcoin is famously bereft of fundamentals. The 2017 crypto bull market, like many before it was based on the “greater fool theory”. New money needed to join the Bitcoin party at $6000 and it never did. Technically, the prospects for Bitcoin are very poor while below 6000. Bitcoin is trading in a bear trend and below its 200-day moving average, with technical indicators firmly in negative territory.

• The marginal cost of production

As the price of Bitcoin drops, the profit gained from mining new coins falls. The marginal cost of production including electricity and rig purchase costs is $4300 according to EFT Securities. $4300 happens to be where the price bottomed out on Tuesday (Nov 20, 2018). Excluding rig costs, the marginal cost of production is $2,250 – perhaps the next logical downside price target.

• Instability keeping institutions away

Lack of interest from major institutional players for Bitcoin has been an ongoing hurdle to Bitcoin going mainstream. Many assumed that the creation of cryptocurrency futures would increase legitimacy and interest. The volatility is starting to attract big traders like George Soros, but large pension and mutual fund investors are a long way from making crypto part of their portfolio.

• Bitcoin ETF approval a long way off

The other great hope for the crypto resurgence is a Bitcoin ETF. An ETF must be approved by regulators, but bitcoin by being decentralised is inherently unregulated. We tend to think there will never be a Bitcoin ETF. If there ever were to be, it is at least 10 years away.

• Hard forks mean unlimited supply

It is no coincidence that the selloff in crypto currencies came alongside a “hard-fork” in Bitcoin cash. As a reminder Bitcoin cash is an offshoot from the original Bitcoin. The hard fork has now divided Bitcoin cash into two separate coins, which are now competing for dominance. The competition amongst different altcoins highlights the immaturity of the market.

• Fraud and regulatory concerns

The drop through $6000 also occurred as US regulators close in on an alleged fraud. Regulatory concerns have weighed on sentiment over recent sessions following the US Securities and Exchange Commission announcing civil penalties against two cryptocurrency companies that didn’t register their ICO’s as securities. This move by the SEC may be the precursor to prosecutions for price rigging, which allegedly (very likely?) drove the Bitcoin price to its all-time high last year.

Still, we could be wrong- the below are two plausible reasons for a crypto market revival.

• Risk On/off

The fact is that the crypto market is not regulated, which makes it more vulnerable to abuse and inherently risky (NOT a haven as many advocates would suggest). Being in a period of general risk aversion and heightened volatility is major reason not be involved a risky trade like Bitcoin. It also works in reverse. When we get the next revival of animal spirits, the crypto markets are likely to benefit.

• Mass adoption: The Doomsday thesis

Hardened crypto fans could still be proven correct by the ‘doomsday bullish thesis’. Central bank monetary tightening after such a long period of easing has a high chance of causing economic unrest. With government debt at record levels, the next crisis could be a currency crisis. A fiat currency crisis might be the best chance for cryptocurrency mass adoption.

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