7 Reasons For The Bitcoin Crash & Why You Should Be Greedy When Others Are Fearful

January 20, 2018

A Message To Our Readers – Congratulations, You Survived The ‘Crash’

How can we not mention the ‘apocalyptic crash’ in cryptocurrencies we saw across the board this week! Well done to all our readers who HODLed. You’ve survived the ‘crash’ and you passed the first test of investing, which is to not lose any money! And to those who didn’t, don’t worry. You can’t be blamed for such horrific numbers. You would have required a heart of steel and a mental resolve of a jaguar not to have been shaken by the -20%, -30%, -40% consecutive daily drops. Kudos to you if you’re one of them. What doesn’t kill you makes you stronger.

In our lifetime so far, we’ve experienced a fair share of crashes in traditional markets be it equities, forex or commodities. We were pretty young and poor during the 2001 and 2008 crashes so we were lucky enough (or unlucky enough) to sit out of them. But those provided formative experiences for us as we observed how the markets moved, how investor sentiment worked, and how history repeated itself without fail. So when it came to crypto, we were prepared for it to be a similar story, only magnified to a much larger degree.

Just take a look at the largest daily percentage losses experienced by the Dow Jones Industrial Average, one of the leading indexes globally.[1] These seem measly compared to what we’ve seen during the past week.

 

Rank Date Close Net change % Change
1 1987-10-19 1,738.74 −508.00 −22.61
2 1929-10-28 260.64 −38.33 −12.82
3 1899-12-18 58.27 −7.94 −11.99
4 1929-10-29 230.07 −30.57 −11.73
5 1929-11-06 232.13 −25.55 −9.92
6 1932-08-12 63.11 −5.79 −8.40
7 1907-03-14 76.23 −6.89 −8.29
8 1987-10-26 1,793.93 −156.83 −8.04
9 2008-10-15 8,577.91 −733.08 −7.87
10 1933-07-21 88.71 −7.55 −7.84
11 1937-10-18 125.73 −10.57 −7.75
12 2008-12-01 8,149.09 −679.95 −7.70
13 2008-10-09 8,579.19 −678.91 −7.33
14 1917-02-01 88.52 −6.91 −7.24
15 1997-10-27 7,161.15 −554.26 −7.18
16 1932-10-05 66.07 −5.09 −7.15
17 2001-09-17 8,920.70 −684.81 −7.13
18 1931-09-24 107.79 −8.20 −7.07
19 1933-07-20 96.26 −7.32 −7.07
20 2008-09-29 10,365.45 −777.68 −6.98

 

The market’s reaction to the past few days has demonstrated that we are not yet at the pivotal danger zones of a bubble and our readers should be reassured that this is a great sign of how 2018 will look for crypto. Did you really think those whales would set up those sell walls to drive down the prices and accumulate as many units as they could, just to see the price remain at deflated levels? Surely not. This is clearly not the end and there are more unbelievable profits to be gained.

What reassures us is that each dip has respected key support and resistance areas with sustained bull runs after each dip. Just take a quick glance at XLM’s trajectory across the last three months.

 

Period Price Start Price Dip Price Peak % Increase
16/10/17 – 7/12/17 0.045 0.022 0.20 909%
7/12/17 – 17/12/17 0.20 0.10 0.30 300%
17/12/17 – 03/01/18 0.30 0.15 0.95 633%
03/01/18 – (?) /01/18 0.95 0.30 0.90

2.70 (?)

300%

909% (?)

 

Each dip saw the price at least halve before shooting up to peak levels. Given the most recent dip was much larger, we’re bullish about a significant price increase in the coming weeks. The number is anyone’s guess at this point, but think about all the buying pressure in the market right now, especially on January 17th as fears of a South Korean ban on cryptocurrencies subsided. The more the rubber band is pulled back, the further and faster prices will return to their rightful levels. This is typical behaviour in traditional markets and we’ll see that accentuated for crypto.

So what were the various strategies you could have adopted during the crash?

 

Strategy Advantage Disadvantage
HODL – ignore the charts and ignore the FUD with the view that price will recover and fresh all-time-highs will be achieved. This is the strategy that causes the least stress from the perspective that you are in it for the long-term. You don’t end up losing any money. You lose time. You don’t know how long it will take for the price to recover. Furthermore, without additional cash, you aren’t capitalising on the price discount.
Sell at the peak and buy in much lower. This strategy allows you to accumulate more. This is what whales do, but they can do it often because they are coordinated. The problem is you cannot pinpoint where the peak will be exactly, though you could have a good guess. A majority of those who trade in and out end up with less.
Sell a fraction of your portfolio to lock in gains with the intention to buy in lower. This strategy allows you to both hold for the long term and facilitate a purchase at lower levels. This requires a lot more thought in terms of how much you want to take out and re-enter. The marginal benefit may be small. Getting the calculation wrong can mean a loss.

 

Our view has always been to go with Strategy #1. It’s just simpler and financially sensible. We’ve calculated upfront how much we’re willing to risk, and we follow through. Plus, it’s easier when it comes to tax calculations as in many jurisdictions, your tax bill will be significantly less if you hold your crypto for over a year. While you may benefit from accumulating more coins with the other strategies, your timing has to be on point.

So what caused the crash?

You couldn’t have had better timing for a lot of negative news to have come at the same time jointly contributing to the crash. All in all it was a terrible week!

  1. Fear of a ban on crypto

Naturally, investors are afraid that crypto will be banned because that means they lose their investment. More and more the media are spreading fear that governments globally are considering ways to ban the asset. However, let’s take a step back and think of it logically. The cost is simply too high for governments to go to the extreme of banning an asset that they really cannot control. They are currently acting as the sheep in wolf’s clothing by signalling their intentions without tangible ways to follow through.

Not only that, they don’t have the incentive to. Smart governments would not aim to ban an investment that can generate sizable tax revenues. We’ve seen that time and time again with real estate. Governments have no incentive to curb property price booms even though it generates a housing crisis out the other end. The economic benefit always trumps the social implications. Jurisdictions with the best tax policies that are favourable to crypto investors will experience the most growth in this century. Therefore, fears of an outright ban are irrational.

  1. Insider trading by South Korean officials

It was unfortunately the case that South Korean government officials have been caught insider trading. With information in hand, they profited just before the regulators announced crypto regulatory measures, causing the major dips that we saw at the start of the week.[2] The nature of crypto is that it is still a small market in the grand scheme of things with the possibility of market manipulation. No wonder we saw the massive coordinated dumps that we did across the board.

  1. North Korea

A conspiracy of course, but consider why South Korea has been adamantly threatening to shut down exchanges and to ban anonymous accounts. The North Korean regime benefits from high crypto prices given that it’s an alternative route to fund the regime in an era of sanctions. A coordinated attack among South Korean regulators, especially at the peak prices during this week would be a major hit to the North Korean regime. The next time you see a bot put up a sell wall, there may well be a North Korean hidden behind it.

  1. Expiration of Bitcoin futures

The first Bitcoin futures contract listed by CBoe expired on January 17th.[3] This likely contributed to the crash perhaps due to nervousness among retail investors around the implications of an expiry for an asset of this nature. The important money from institutional investors and hedge funds are yet to fully join this space. After a few more iterations, we will likely not see such huge volatility due to an expiration in future.

  1. Problems at exchanges

When exchanges experience problems, this is a damage to user experience, which in turn means less cash flows through as it should. Bitfinex temporarily stopped account registrations, Kraken extended its software upgrade from two hours to two days and still has shut off its withdrawals portal, and Poloniex and Binance rejected all deposits and withdrawals for an extended period of time. Stresses on market infrastructure creates a bottleneck for buys and sells and the lack of liquidity often leads to increased volatility. What excites us is that there are potential solutions in the near future run by FairX that will help mitigate these issues.

  1. Celebratory period

There is a theory that due to the Lunar New Year in February, investors are cashing out. As the crypto market is largely comprised of retail investors, the market will fall across the board. We certainly saw a slump in December for Christmas so this is a reasonable explanation but it cannot be the whole story.

  1. The shutdown of Bitconnect

The Ponzi scheme that was Bitconnect confirmed this week that it was shutting down. Many Bitconnect investors suffered and lost their money in the scam. We would like to reiterate to our readers that there are many cryptocurrencies out there that appear at first to be lucrative but will come back to bite. 2018 will likely see a lot of shutdowns. Do your research, observe the quality of the Reddit community, and only invest as much as you are willing to part with. The opportunity cost of not investing in a top cryptocurrency with a true purpose and use cases is just too high.

 

What can we expect going forward?

Growth and lots of it. To make a comparison, the total market capitalisation on December 22nd was $430bn, and XLM was at $0.20. Today, with the same total market cap, XLM is valued at over $0.30. Not only will viable cryptocurrencies grow in their own right, but the entire crypto market will experience organic growth – just take a look at our predictions for 2018.

Crashes like this one will happen time and time again. If we’ve seen 60% drops like this, we’ll see even bigger ones again, so be prepared, not scared; be greedy, not fearful.

Price is naturally important because that is undeniably the driver of a majority of investors seeking a return, but more so than ever, focus on protecting your assets. This generation of investors are facing unprecedented amounts of challenges – market manipulators, whales, bots, sell walls, hacks…just think about what happened to Black Wallet. No matter what you own, the security of your investment is of utmost importance before everything else. Make sure what you own is truly yours and the rest will come naturally.

 

References:

[1] https://web.archive.org/web/20080920224647/http://www.djindexes.com/mdsidx/downloads/xlspages/high_low_lights.xls

[2] https://news.bitcoin.com/south-korean-officials-caught-trading-on-insider-knowledge-of-crypto-regulations/

[3] https://www.coindesk.com/cboes-first-bitcoin-futures-contract-expired-today/

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