Why Bitcoin’s price dropped by 20%

The price of Bitcoin has dropped substantially over the last month, with South African cryptocurrency exchanges registering a 20% overall decline for the period.

At the time of writing, the price of Bitcoin is at R133,196 – far lower than the R168,152 it was worth on 3 September 2019.

VALR co-founder Farzam Ehsani said that volatility is a part of the cryptocurrency market, with Bitcoin still being subject to large value swings.

“The price of Bitcoin is subject to the raw forces of supply and demand in a relatively illiquid market compared to international foreign exchange markets,” Ehsani said.

“The combination of having no broad consensus on Bitcoin valuation and the relative thin liquidity of its trading can result in very large price swings.”

Luno Africa general manager Marius Reitz said that volatility is normal in the price of Bitcoin, although this drop could be attributed to several reasons.

“Bitcoin and other cryptocurrencies have great potential to be effective tools for storing, maintaining and exchanging value – this hasn’t changed,” Reitz said.

“In fact, people in South Africa are buying cryptocurrency for the first time every day despite the drop in prices.”

According to local exchanges, there were four main reasons affecting the price of Bitcoin which caused it to drop by 20% over a month:

Short-term traders

Reitz said that short-term traders still comprised the bulk of trade volumes across all major cryptocurrencies.

These traders try to capitalise on price fluctuations to make quick returns on their trades, and they have even been known to collude in an attempt to manipulate the prices of smaller cryptocurrencies on various exchanges.

“The crypto price is still dominated by short term traders with most price action being driven by short term technical analysis,” Reitz said.

Long-term investors also comprise a fair amount of Bitcoin owners, but these users are less likely to buy and sell frequently and would be more prone to riding out big movements or selling their investment for good.

“It is important to note that this volatility isn’t always to the downside and we have seen several cases of large increases in the 24hour price movement,” Ehsani said.

Negative sentiment

“The main reason for the drop in Bitcoin’s price has been the negative sentiment across all markets caused by the global geopolitical news flow,” Reitz said.

He explained that this sentiment has impacted all asset classes and has happened at a time of low liquidity which has led to volatility.

“When there is more liquidity and markets become more risk-averse; there is still money going into safe-haven assets like gold and yen. Many of these investors have placed a small amount into Bitcoin as a hedge.”

“However, even safe havens are struggling to find buyers,” Reitz added. “Bitcoin slumped last month and gold has also dropped in the last 30 days.”

“Several large cryptocurrency trading platforms also offer leveraged trading and when a sudden sell-off occurs, this can be exacerbated by long positions being closed out and further fueling the price decline,” Ehsani told MyBroadband.

New exchange

Reitz said another factor which has affected the price of Bitcoin is the impact of a recently-launched exchange for trading Bitcoin futures.

“Bakkt, a long-awaited platform for trading Bitcoin futures, opened on 22 September amid hopes the exchange would attract more buyers to cryptocurrencies, with some anticipating an institution-led bull run,” Reitz said.

“Bakkt volumes have been lower than anticipated and the sharp decline in crypto prices has been linked to this disappointing start.”

Ehsani also stated that the launch of Bakkt might have affected the price of the cryptocurrency.

“The most recent decline in price may be related to the launch of Bakkt, a Bitcoin futures platform owned by Intercontinental Exchange which owns the New York Stock Exchange,” he said.

“The volumes on the launch of Bakkt were not as high as many anticipated which may have spooked the market, causing a steep sell-off.”

Innate volatility

Lastly, Reitz explained that new asset classes can be more volatile than established assets.

“New asset classes can be more volatile – Cryptocurrencies are a new asset class, so there will always be a higher level of volatility compared with traditional trading,” he said.

“However, as the benefits of cryptocurrencies become clear, more people and businesses will hold the coins for their utility value, which will reduce speculation and limit volatility.”

He said that the improved adoption, functionality, and regulation of cryptocurrencies like Bitcoin would likely serve to stabilise the price of the cryptocurrency.

“As regulation is introduced and the functionality of cryptocurrencies increases, the true price will become more consistent,” Reitz said.

“I expect the volatility in the bitcoin and cryptocurrency markets to remain for a long time to come.  Bitcoin remains a nascent asset and continues to divide even the most erudite of our society,” Ehsani said.

“Until Bitcoin becomes a more common and known asset to the everyday person, we should expect tremendous volatility to continue in the future.”

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Why Bitcoin’s price dropped by 20%