It Took a Lot of FUD to Spur on the Cryptocurrency Correction; And Despite it All, Most Coins Are Still at November – December Prices (AKA Many are up like 800%+ in 12 Months)
Below we present a list of reasons why Bitcoin and altcoins dropped from their all time highs in late 2017 – early 2018. In other words, we examine factors that impacted the January – February 2018 correction.
The idea will be to show how the increasingly strong demand for cryptocurrency has been temporarily dampened by a string of unfortunate events. Further, we will show how a large portion of those events have been bad news that was blown out of proportion and ended up being unsubstantiated FUD.
The bottomline: It took a lot of FUD to spur on the cryptocurrency correction and keep price trends bearish given the rapidly increasing demand and rapidly evolving technology. Even with all the FUD, the market has shown a lot of resilience. This hints that an exciting 2018… once the bear market passes.
NOTE: When Bitcoin goes up fast or corrects it tends to have a direct effect on altcoins. Thus, the story of the correction starts with Bitcoin, and honestly it will likely end with Bitcoin recovering. One overall note is that Bitcoin began to correct first (by stagnating then dropping slowly in waves). In the period that Bitcoin stagnated, alts rallied. It wasn’t until alts had all reached highs that Bitcoin and alts all began to drop together. Since they all started dropping, alts have dropped faster than Bitcoin. This all fits historic patterns. Historic patterns playing out is good, as the next part of the pattern includes coins rising again. See the relationship between Bitcoin and altcoins.
The catalyst of the January – February 2018 Cryptocurrency correction: First and foremost, a correction was due after almost every cryptocurrency reached an all time high. First Bitcoin, then Ripple, then Ethereum, and in-between just about every cryptocurrency. A correction should be expected after a time like that. All it takes is a bit of bad news after that series of events. However, no one knew when the correction would come or how deep it would be. As it turns out, it came quickly and was deep. See how the historic rotation tends to play out for a sense of how history repeats and what is likely to come next.
A List of Events That Impacted the Crypto Correction
Below is a list of events that spurred on the Jan. – Feb 2018 correction and kept it going (this list is roughly in chronological order; but not exactly):
- Crypto tends to boom in December and correct in January. Historically this pattern has played out more than once. Many new users didn’t know, many long term holders told themselves “this time it’ll be different.”
- Bitcoin futures trading starts. Many hoped futures would bring stability. Many feared that it would first however will be an excuse to crash and short the Bitcoin market (previously you could only short Bitcoin by margin trading on a few select exchanges; now you can short Bitcoin from the safety of your professional trading desk). Futures might bring legitimacy and stability at some point, but the concern over futures seems to have not helped Bitcoin thus far. Further, the rally prior to futures ramped up right when futures were announced. Thus, there are an odd series of events here. NOTE: It is unlikely institutional investors forced a crypto correction using futures as a catalyst, it is more likely the bulk of the selling and panic spreading is coming from within the crypto sphere. Simple stupid is this: the same forces who pushed the market up, pushed the market back down using futures as an excuse.
- Crypto exchanges stop new sign ups and open up waiting lists. This happened in late December and early January. The lack of new users meant that those who wanted to trade altcoins had limited options.
- Bitcoin Cash has a bumpy release on Coinbase. Bitcoin Cash aims to prove itself the real Bitcoin by spreading FUD about Bitcoin as a marketing strategy. So far, not so good for that tactic. After causing a correction back in early November, Bitcoin Cash returned again for more drama in late December when it was pumped up right before being listed on Coinbase. Shortly after that Drama Bitcoin began its decline.
- South Korean exchanges being taken off Coinmarketcap. This made it look like prices of all coins had dropped. They didn’t, but since this happened at all time highs, it spurred on a small panic. Ripple never recovered from this. To be fair, the core problem here was that South Korea was bidding up coins beyond what the rest of the world was and this created a fear of rampant speculation (which as you’ll see below, authorities responded to).
- Ripple (XRP) confirmed not to be added to Coinbase. Coinbase/GDAX had planned to add new coins. People started a rumor that XRP would be added. This helped fuel the rise of XRP. When it was confirmed it wouldn’t be added, the price began to decline. It took ADA, XLM, and a few other low price / high supply alts with it.
- Word of South Korea banning exchanges and a raid. South Koreans are a major player in the global crypto market. At times they drive prices. So when the government shifted gears from “sensible regulation” to “total ban + a raid on major exchanges” it created a panic. Luckily, there was no ban and nothing much came from the raid. Instead one branch of government organized a raid and another branch had to come back and confirm that there was no ban. The result is exchanges were going to be regulated and taxed like the plan was in the first place. The panic was thus, over nothing.
- Word of China cracking down on crypto… again. China FUD is common in crypto, it has probably caused more corrections in the history of crypto than anything else. China once again announced sort of ominous, potentially real, but very likely over blown plans to crack down on crypto. Word on the street has included them cracking down on miners and them cracking down on exchanges. They had previously cracked down on ICOs. Its always hard to tell how serious or official any news like this is.
- Bitconnect shutting down its exchange. Bitconnect had been accused of being a Ponzi, and everyone’s worst fears came true when they shut down their exchange and the price of Bitconnect tokens dropped by 90%. They shut down right in the middle of the Bitcoin correction when alts started sputtering. Essentially, they did what everyone assumed they would do and took everyone’s money and ran the second Bitcoin wasn’t just going up any more. This meant many investors were out Bitcoin, this like also means one big player had a ton of Bitcoin liquidate right in the middle of the correction.
- Weak Hands and a Loss of Resilience. New investors who jumped into BTC and alts for a quick buck were perhaps over eager to “stop their losses” and ill prepared to hold through the deep corrections that are common to crypto. Meanwhile, the market as a whole was getting a little too accustomed to a constant and unstoppable boom. In other words, because the times had been so good and because the boom came so fast, the market was full of weak hands. With so many eager to sell, and with coins needing a correction, it is easy for Bears to spark on a wave of selling. That then compounds and shakes more coins out of weak hands in vicious cycle. As the cycle keeps going, it takes out more and more holders.
- Some big names like Warren Buffet and from Wells Fargo CEO Dick Kovacevich came out against cryptocurrency. This has been a constant pattern. When things are going well they get ignored mostly. When things are going poorly the media tends to be quick to spread the anti-crypto talking points and the fears of big players in finance and investing.
- Legend has it that the Chinese sell off all their crypto assets each year in January in anticipation of “Chinese Spring Festival.” The idea being that they aren’t supposed to trade or gamble, but are supposed to buys gifts for friends and family (but wait; wouldn’t they buy their friend crypto with crypto?!… anyways). Supposedly this is part of the reason crypto seems to dip every January. They even notably close the stock markets during Spring Festvial. With all that said, while this theory made sense last year, when the Festival started January 28, it makes less sense this year as it starts February 16 (note that the eve of the first day is celebrated). Perhaps though this will or did contribute to the current mods of the market.
- Coincheck, a major exchange was hacked and about $500 million in XEM was stolen. The exchange quickly made good on refunds and squashed fears. But this happened late into the correction and it didn’t help.
- Tether concerns arise again. People like to spread Tether FUD. If you take down Tether, you almost certainly will cause a substantially crypto correction. Thus, those who want to drop prices aim their sites at Tether. The story is long and complex, but the bottom line is: Some guys on Twitter spread Tether FUD, Tether refutes it. See an article on how to understand the Tether controversy.
- India Says “Crypto isn’t legal tender,” internet hears “crypto is illegal.” This is one of the more mind numbing bits of FUD. India didn’t ban crypto, they just reaffirmed that you can’t pay your taxes with crypto (it isn’t legal tender). Yeesh.
- Credit card ban by banks. Some major U.S. banks decided to stop crypto based credit card purchases and a few stopped most if not all crypto related transactions. Kind of hard to buy the dip when your bank won’t let you. Another problem of demand outpacing the ability to buy crypto.
- Stock market dips in early February. Right when Bitcoin looked like it might recover, the global stock market started correcting a bit. This is where we are at now, so I can’t report on its effects.
- The feedback loop of media, social media, and TA. The media was eager to play into fears to drum up the headlines noted above, everyone on social media kept pointing to $6k and $8k support levels for Bitcoin, TA people looked at the charts and decided their tea leaves were gospel (that certainty had become the new probability). When everyone knows for sure it’ll go to $7.5k, it increases the chances it will. Everyone knew for sure Bitcoin was going to $20k, it essentially did. The human desire for booms and busts mixed with human nature and psychology affects markets. Markets are mostly humans buying and selling, analyzing trends is analyzing the trends of human buying and selling, when the news is good bulls lift up the market and you can see it in a chart, when the news is bad bears drop the market and you can see it in a chart. The media reports, people on social media discuss, a feedback loop is created. NOTE: Clearly the chart looks like what it looks like, that is, it looks like a bubble that busted that will see prices steady out around some historic support level (a return to the mean). Thus, anyone who knows how to analyze charts will have called a bear market that will end at X support. However, the chart is only showing our story above manifesting. If we didn’t get the wave of FUD, the support would have likely been higher. In a market full of FUD, the most bearish views start to manifest. When they manifest bearish predictions are reinforced and it creates a feedback loop. So TA and media is very useful, but it does risk creating a negative feedback loop in bad times and a positive feedback loop in good times. This is a general comment and it is ongoing.
- A lack of volume and experience, and too much impulse buying and speculation in the crypto space creates room for manipulation. If there were many different traders trying to manipulate the market (like in FOREX), they would likely cancel each other out on most days. However, there are clearly a limited set of manipulators who have a little more control then anyone would like. A lot of the growth in crypto is natural and is a result of demand created from new adoption (you really had a hard time buying or trading crypto as an average Joe until 2017; and its still rather heady). The problem isn’t that the demand and adoption isn’t real, or that it is all purely speculative. It is that the demand is there at any price when the market is going up. Thus, manipulators with deep pockets will do their best to push markets up (this isn’t that hard to do when the natural sentiment is pointed that direction anyways). Then, after way too much pushing up, a correction is in order (as a speculative bubble has just been created in hyper-speed and it now needs to pop; basic economics). Knowing all this, the manipulator then shifts into bear mode and pushes the market back down. One can margin trade this to make a killing (and now can use futures contracts to make even more). The problem is, as eager as people are to buy when its going up, they are just as eager to sell and not to buy when its going down. This is why we get these deep corrections in crypto followed by big booms. If we had investors would bought gradually at any price, and if we had volume things would likely be much more stable. One could see Bitcoin moving more like a FANG stock in the future. Until then, crypto is a bubble and bust economy in hyper speed.
Conclusions, Insight, and Take-Aways
Ultimately my view on the above is this:
It took a ton of factors to cause the last crypto correction.
Even after all the correcting so far, we are only back to November – December prices (depending on the coin).
Why? Because cryptocurrency is new, exciting, and is likely to be an important part of the future.
Of course, all that excitement has implications, and we’ve just seen many of them play out (the boom caused by excitement and many new adopters flooding the space at once; the bust that resulted from overeagerness, speculation, a large pile of FUD, and more experienced traders with deep pockets taking advantage).
To anyone in the crypto space long enough (a few months to a few years) this is old hat and run of the mill. To anyone just coming in, you have just earned your stripes and now have a better sense of what to expect and thus how to play your hand.
The reality is crypto years are like dog years, the great bubble of June, becomes the great bubble of August, becomes the great bubble of November, becomes the great bubble of December – January. This one was rough, but the pattern is common.
As noted above, the crypto economy is a bubble and bust economy in hyper speed.
It isn’t one bubble that popped, it is a new market that keeps bubbling too quickly and having to correct.
This time, to spur on a correction, it took a ton of quick gains and then a constant month long flow of bad news.
If it weren’t for all the bad news then prices would have settled a bit higher. If we get more bad news they could settle a bit lower. However, assuming this isn’t the end, it is very likely that the correction cycle will pass soon and we will see either stagnation or a rally.
For all the factors that aren’t fully natural in crypto, there is one thing that is, demand for crypto.
You can think, “people will be burned out by taking heavy losses” or you can think “wait, if what just happened happens again, literally every single crypto has room to make really big gains.”
If you are going to consider trying for those gains, do yourself a favor, buy the dip or buy when we get clear signs of a recovery, don’t wait and FOMO buy at the top only to get shaken out later when a stream of bad news and sellers push the market down.