As everyone knows, bitcoin has dropped roughly three-fold from its December peak. At the height of the mania it touched $20,000 but has since fallen to as low as $6,000. The question of what caused the great decline is one that most bitcoiners have an opinion on. In a bid to settle the matter once and for all, Chainalysis has pored over the data to determine what happened.
Chainalysis is a respected research team whose data scientists and blockchain analysts have previously claimed to have worked out where Mt Gox’ missing bitcoins wound up. In “The Great Bitcoin Price Dip: Its Causes and a Way Forward”, Chainalysis turns its attention to BTC price action over the past three months. A lot of what’s in the report could have been deduced without glancing at a graph, but it’s interesting to see these observations backed by evidence.
According to Chainalysis, bitcoin’s big sell-off was a result of “Regulatory news driving trading volumes and a peak of positive sentiment pushing price; and a lack of fundamentals resulting in herding behaviour across increasingly correlated exchanges and cryptocurrencies.” Basically, we’re all just a bunch of herd animals driven by our emotions, and when one of the flock gets spooked, we all do.
Determining a “fair” valuation for the price of 1 BTC has kept the brightest cryptonomists up at night. Chainalysis acknowledges the difficulty of valuing bitcoin, part of a new asset class, writing “Traditional markets have an established set of market fundamentals that help investors understand and contextualize price and volume fluctuations. The cryptocurrency world is still figuring out the correct fundamentals to use in situations of massive price volatility.” It then adds: “Trading volumes were sensitive to regulatory news, while price was driven by sentiment.”
Anyone who followed bitcoin’s trajectory throughout 2017 will have been aware of bitcoin’s susceptibility to regulatory news; the cryptocurrency saw a major sell-off following news that China was to ban bitcoin, but made a full recovery within weeks. In its report, Chainalysis also references other commonly used markers to denote the mania phase that bitcoin settled into through the latter half of last year, Google searches climbing faster than the price. Bitcoin couldn’t maintain its insane upward trajectory and something had to give:
In the stock market, a price correction is defined as a decline of at least 10% and a bear market is a decline of over 30%. Between 17 December and 6 February, the Bitcoin price declined by 70%.
The broad conclusions drawn by Chainalysis – that regulatory events and emotions drive the markets – are not surprising. The report does contain some interesting findings however, such as the fact that trading volume across major exchanges became increasingly correlated through December and January compared to the whole of 2017. This meant that what happened on one exchange would be mirrored almost instantly on another. If one whale got spooked and dumped – say, the Mt Gox trustee for example – everyone got spooked.
As bitcoin mania reached fever-pitch in December, exchanges experienced a “new in-flow” of bitcoin: investors were depositing more crypto than they were withdrawing. “As a consequence, supply was increasing at a greater rate than demand, and therefore the high price levels could not be sustained,” notes Chainalysis. The report concludes by providing evidence that altcoin prices are “increasingly correlated with Bitcoin prices”. There might be more altcoins and tokens than ever before, but some things never change: what happens to bitcoin happens to them all.
Do you think Chainalysis’ findings are accurate, or do you think other factors contributed to bitcoin’s big sell-off? Let us know in the comments section below.
Images courtesy of Shutterstock, and Chainalysis.
Written by Kai Sedgwick