Why bitcoin's slump could be a good thing

"It can shake out some of the speculators"
January 18, 2018, 12:12pm
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"BUBBLE"

Despite the stabilization of bitcoin’s recent slump, a group of researchers warned Thursday the cryptocurrency price is likely fall further as the bubble starts to burst.

The team at Capital Economics, a London-based research company, sent a hugely pessimistic note to clients Thursday regarding the world’s largest cryptocurrency:

“Claims that cryptocurrencies will replace established fiat currencies are rubbish; our view is that bitcoin is a bubble. Indeed, the latest price falls suggest that the bubble is bursting — although with prices still ten times higher than a year ago, they have a lot further to fall yet.”

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The price of bitcoin dropped from a high of $20,000 on Dec. 16 to a low of $9,200 on Wednesday, with other cryptocurrencies, including ethereum, litecoin and ripple, experiencing similar slumps.

The recent price drop has been pinned on increasing regulatory oversight in countries such as China and South Korea.

Furthermore, investors in South Korea and Japan — major cryptocurrency trading hubs — are paying a significant premium over the price of digital coins in Western markets.

A recent drop in trading volumes in Asia suggested traders in that market were no longer willing to pay the premium that was often as much as 30 percent.

"HODL"

Yet all is not lost. There was a slight increase in volume in Japan and South Korea Thursday, while the premiums dropped from 25 percent and 30 percent respectively, to 15 percent and 18 percent, according to data from social trading platform eToro.

Mati Greenspan, an analyst for eToro, told VICE News this was a cause for optimism.

“Though the prices are still elevated, this is a great sign that the market is indeed evening out,” he said.

“The crash is actually a good thing for the industry as it can shake out some of the speculators and consolidate the tremendous gains seen over the last few months,” Greenspan said. “Of course, the best thing would be a sustained reduction in volatility to increase stability.”

Capital Economics’ team said it is hard to predict the complete collapse of bitcoin, suggesting a number of events which could trigger it. These include: further regulatory crack-downs; a major hack, such as the one that hit the Mt Gox exchange in 2014; and a rise in derivatives trading.

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While the recent price crash has concerned many new investors, experienced traders have seen it all before, with the rallying cry of “HODL” echoing across cryptocurrency forums this week.

Though many investors will have been burned in January, the overall fallout from a complete bitcoin collapse would be pretty insignificant, Capital Economics argues.

“The fallout would be modest at the moment because bitcoin’s market capitalization is still small. Bitcoin is also not held by institutions and it has little correlation with other financial markets,” the research note reads.

But as more institutions look at bitcoin and the blockchain as potential investment vehicles, the greater the risk of fallout from a crash.

“The advent of bitcoin derivatives trading, for instance, has made it easier for institutions to get exposure to bitcoin, potentially raising the systemic risk of a large drop in prices,” Global Economics warns.