Cryptocurrency crash and its aftermath

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Konstantin Sheiko
January 25, 2018

The term ‘financial pyramid’ has never made much sense linguistically. Architecturally, a pyramid is the most stable structure ever designed by the human genius. Yet in the world of financial markets and speculation, the ‘pyramids’ have been notoriously fragile, unstable, and unreliable. They almost always collapse, and the question usually is not ‘if’, but ‘when’ the downfall will take place. 

Although the end of a particular financial pyramid is always ignominious, it generates powerful, recurrent shockwaves that agitate the markets, leaving in their wake hordes of disappointed investors and shareholders, all of them much poorer than they were only a few days ago. 

The cryptocurrency market is no different in this respect. Perhaps it is even more prone to the volatile ebb and flow of the world’s financial sector. Bitcoin and other digital currencies have always been experiencing value fluctuations, so even a big daily drop is not too unusual. That said, almost all of January, except for its starting week, was a particularly ugly month for crypto investors. 

On some ‘black’ days of an already bad month, every major currency experienced drops anywhere from 15% to 28%. Calculation by Fortune and other analytical outlets show that the top ten currencies collectively lost billions of dollars in January, including $108 billion lost in twenty-four hours on January 16. 

Ripple prices fell, with the cryptocurrency losing more than $33 billion from its market cap since Saturday, January 13, and a share price plunged as low as $0.91 (£0.66) on Tuesday, January 16, from a weekend high of $2.05 (£1.49), and an all-time high of $3.84 (£2.79) earlier this month. The market cap of Ripple has fallen by $32 billion from Saturday’s price of $79 billion (£57 billion) to just $37.8 billion (£27.4 billion) on Tuesday, according to CoinMarketCap. Ripple’s market cap on Wednesday was worth $46 billion (£33 billion).

Bitcoin, Ethereum, and other cryptocurrencies also went through severe downgrading. Bitcoin lost the most in terms of absolute value (about $39.2 billion), but only 16.7% of its overall market cap, while once-surging Ripple dropped 27.4% (a loss of $19.1 billion). These 10 currencies account for the vast majority of the crypto-currency market’s overall value, though there are hundreds of smaller and more obscure currencies that are together worth tens of billions of dollars. Those currencies, with a handful of exceptions, likewise took a beating on Tuesday, January 16.

So far, there does not appear to be one single explanation for Tuesday’s drop in crypto-currency values. Some analysts speculated that reports of Chinese regulatory action may be a factor, others pointed out that the drop happened amid fears of an imminent trading ban in South Korea imposed by regulators; more broadly, the market has been slumping for over a month, following an upswing in early January.

While Bitcoin has weathered numerous crashes in the past, and always bounced back, the current situation may be different. That is partly due to the flood of other currencies, many of them with little pedigree or purpose that have come into the market. It is also different in that the recent price speculative flurry has attracted a large number of traditional financial firms and ordinary investors. Many of them learned about digital currencies only in recent months.

In the meantime, Bitcoin and other digital currencies continued their January tailspin. The market consistently showed substantial declines, with most cryptocurrencies falling 20 to 40%. Bitcoin also notably lost more than £725.90 ($1,000) between 7.14am and 8.34 on Tuesday, January 16, constituting a 65 percent plunge on its December record high of £14,507.80 ($20,000).

On Wednesday, January 17, the top 10 cryptocurrencies, including Bitcoin, Ethereum, and Ripple, saw their collective market share drop $134 billion. Ripple’s poor performance came along Bitcoin plunging down to $9,724.20 – a price not seen by investors since November 2017. According to CoinMarketCap, all digital currencies in the top 100 fell during the 24-hour period. The total global market cap for cryptos dropped to less than $432.5 billion, down from its all-time high of more than $832 billion earlier this month.

According to a Markets Insider report, the slip in XRP prices could have cost Ripple co-founder Chris Larsen nearly $12 billion. Mr. Larsen currently holds onto 5.19 billion XRP tokens. Briefly, at the start of the New Year, the fintech entrepreneur was considered one of the richest people in the world. 

The experts attempted to explain the top crypto tokens plunge in prices and market capitalizations, including Bitcoin and Ripple’s XRP, by the market self-correction. Cryptocurrency bubble has not burst yet, encouraged Dennis de Jong, managing director at UFX.com. 

He said: “After riding on the crest of a wave for the majority of 2017, Bitcoin traders have been left scratching their heads as to how the cryptocurrency has slipped as low as $9,000 after hitting heights of $19,000 just one month ago. While some of the newer currencies on the market went from strength to strength in December, it looks as if there has been an adverse effect on their durability too - Ripple has tumbled more than 40% for the year so far. Despite this blip, it’s still too early to suggest the bubble has completely burst, and this could be the ‘price adjustment’ that market experts had warned of lately. The majority of those experts maintain that market volatility is to be expected, so don’t be surprised to see a resurgence in Bitcoin in the coming weeks - it’s unlikely that there will be any large-scale panic departures from the market just yet.”

Although the market panic did not materialize, just as the experts had predicted, but, by ten o’clock on Wednesday morning, it was obvious that more than $200 billion was lost in crypto crash. Continuous deterioration of the cryptocurrency market stimulated the major token sell-off that struck cryptocurrencies on Tuesday, continuing on Wednesday. 

The total market capitalization of every virtual currency stood at $653.8 billion, but since the markets were plunged into chaos over increased threats of crypto regulation, the market cap fell to a low of $450.5 billion. As of Wednesday morning, the market struggled to bounce back, fluctuating around $500 billion-point. According to CoinMarketCap, the total crypto market cap was valued at over $484 billion. 

After a week of decline and two days of disastrous losses, it is good to take a slight step back. Perhaps things are not quite as terrible as they appear. Indeed, the losses constitute a staggering number, including the $100 billion loss on the 16.12.2018. What prevented the drop from being more catastrophic was the fact that six of the top 10 currencies were still in the black compared to a month ago.

In fact, removing Bitcoin’s $155 billion one month-drop in market capital from the equation, shows the sector slightly gaining. When Bitcoin’s losses are not factored into the back-of-envelope math, the total market cap for the remaining currencies in the top 10 is $21 billion higher than it was on Dec. 17, 2017. 

How big a drag does that make Bitcoin? To put it in perspective, the one-month market cap drop in that cryptocurrency alone is greater than the total market cap of Mastercard, Boeing, and McDonald’s, or is roughly equivalent to more than a quarter of the value of Amazon or Berkshire Hathaway, according to data from PWC. 

On January 25, the total cryptocurrency market cap stood at $558,520,570,025, Bitcoin at $191,919,318,694, Ethereum at $103,686,329,492, and Ripple at $52,305,203,232. Ripple XRP value to US dollar is around $1.3.

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