The bears ruled the cryptocurrency market over the past month, which seems to be a clear indication of a major correction at the very least and maybe a longer bear market for cryptocurrencies.
While a month does not really seem that long, when it comes to Bitcoin and other popular currencies like Ethereum and Ripple, it is a lifetime. All one has to do is consider how price fluctuates from a day to day basis within the cryptocurrency world to see that stabilization is definitely not digital currency’s strong suit.
Yet, for the past month or so digital currencies, specifically, Bitcoin, has been steadily stabilized in a downward spiral. What does this mean?
Case Study: Bitcoin
The recent price decline of Bitcoin may be giving a clear indication as to where the overall cryptocurrency market is headed as it has the largest market cap amongst all digital currencies in existence ($137 Billion).
As the price of Bitcoin began decreasing in early January of this year, so did all the other digital coins. Therefore, it seems to be a good rule of thumb that if Bitcoin goes up, the rest of the cryptocurrencies will follow suit and vice versa.
The major factors in Bitcoin’s recent decline are due to tightening regulations in Asian countries, theft, and market price manipulation. Those are, of course, just the external factors but one must also consider one more internal factor: everything that goes up must come down.
Bulls Turn To Bears
All financial markets go through Bull and Bear cycles and it seems that the cryptocurrency market is no different. Most Bull Markets end up crashing quite swiftly, especially when those Bear Markets ended up forming Bubbles. Many professional investors believe that we have just witnessed one of the largest financial bubbles in existence through the continuous price hike of Bitcoin over the last year.
How much did the value of Bitcoin rise in 2017? Let us just say that even when compared to its all-time high in December of last year (close to $20,000), its recent decline to a little over $8,000 still leaves early investors with a whopping 800% ROI.
One good indicator of a Bear or Bull Market run is to determine the fair value of the underlying assets as markets tend to correct themselves to this price over time
In this case, Bitcoin would be the underlying asset which could determine the fair value of the overall cryptocurrency market.
However, unlike stocks and bonds, where they are definitive value factors like dividends and cash flow, Bitcoin does not, as of yet, have such definitive features in which to measure it by. This makes it very hard to figure out then if the current decrease in value is a correction, a Bear Market, or a minor hiccup owing its recent drop to bad news.
Regulation May Be Good For Bitcoin
One of the major factors that we can attribute to the devaluing of digital currencies as of late is the mounting regulatory policies being set in place by countries like China and South Korea.
While Bitcoin investors seemed to have speculated that such regulations would spread to other countries and put an end to what seemed to be an unending price increase, it may, however, prove to be the digital currency’s greatest boon as regulation could both legitimize and safeguard the trading of Bitcoin and other cryptocurrencies. As an added benefit, slight regulation may also make it easier to value and thus predict price fluctuations and predictable market trends.
In essence, current regulatory policies concerning cryptocurrencies may have lead to a short-term Bear Market but could end up producing an even longer Bear Market.
This is not to say that Bitcoin and other major digital currencies are currently in a Bear Market for after dropping from $10,000 to $6,000 this month alone, it is currently making its way back and now stands at approximately $8,400.
This could mean that the correction is over if investors truly feel that Bitcoin has dropped well below what they believe its potential value to be.
If this is the case, then the largest Financial Bubble in history may have just given birth to the shortest Bear Market in history.