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Bitcoin saw a dramatic drop in price the past few days, but what is to blame?
Bitcoin is far from being a stranger to sudden price swings. The cryptocurrency achieved global notoriety when it increased in value from only a few dollars to nearly $1,200 in just eleven months and then lost more than 50% of its value just a few months later. The latest price swing however seems different somehow, the reason for it more elusive than other similar events in the recent past. The forums are abuzz with rumors ranging from margin trading to an NSA plot to take over Bitcoin.
The fact is that this time probably is different for a number of reasons. During the last several months several major retails and service companies have begun to accept Bitcoin. The selloff of even a few thousand Bitcoins on a single day can drop the price significantly. Dumping like this could be caused by merchants dumping the coins as soon as they get them or it could be a deliberate attack. Even a minor dump can cause a cascade as lower prices dishearten miners who suspend activities, which in turn drops the price again. These types of actions however, if they are deliberate, would cause many millions of dollars to put into play according to many experts. Dave Hudson of PeerNova said about deliberate attacks:
“Any sort of overt attack on bitcoin would seem likely to add more legitimacy to [it] in the eyes of many observers; surely this must be really important if [someone] is prepared to spend $100m to attack it.”
This makes the idea of a vast conspiracy unlikely at best. But some experts believe that the problems with the Bitcoin price are not external at all but actually come from Bitcoin miners. The industry has already had problems with server domination by cloud mining operations this year but this new problem may be much worse: Margin trading. Raffael Danielli, Quantitative Research Analyst at ING Investment has speculated that out of control margin training may be the main culprit in the price drop. Danielli says that a flash crash at one exchange caused ripples across the industry. He focuses on one Hong Kong-based bitcoin trading platform Bitfinex.
The recent global economic crash was partially caused by similar behavior: Banks investing money that did not belong to them. Margin traders borrow money from brokers in order to bet long or short. Bitfinex launched margin trading in June of 2013 and other exchanges, like China’s largest Bitcoin exchange OKCoin in June of 2014. But while margin trading is common on established exchange it is new to Bitcoin and the crypto ecosystem. Danielli speculates that the BitLicense announcement led to a lot of long bets on Bitcoin that went south when the community reacted with a great deal of negativity.
There were also a number of other factors as well that could have added to the nervousness of the market. The negative reaction to the Bitlicense proposal, followed by the IRS ruling that Bitcoin was considered property and not a currency, could have led to concern about over regulation. The problem is that when things like this happen, and they do happen in all economic niches, investors tend to panic and sell, which aggravates the problem overall and could even start a panic of selloffs that could do lasting damage to not only Bitcoin but cryptocurrencies as a whole.
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