The reasons for the collapse of the crypto currency market: the bankruptcies of exchanges and the manipulation of prices by large investors. What to expect from crypto currencies
On December 21, the crypto currency market plummeted for the first time in history, losing almost $150 billion of capitalization (about 25%) in 24 hours. Almost all coins from the TOP-100 lost in value, some of them lost 30-50%. The impulse for the fall was the hacking and bankruptcy of the Youbit exchange, but this was hardly the reason. Read the review to learn about the possible causes of the market fall, about pump and "hamsters," as well as what an ordinary investor should expect from the crypto currencies.
Youbit and EtherDelta hacks: accident or not?
Crypto currency investors will remember the morning of December 22, 2017, for a long time. Many may have realized that the crypto currency market was inflated with a bubble, but few people suspected that the collapse would happen so quickly. It only took a month for the total capitalization to increase by more than $150 billion (to more than 630 billion) and only 24 hours to lose it all. Here are some interesting figures of this morning:
- as of 21.00 on December 21, the market capitalization was just over 600 billion, as of 11:00 Moscow time - 478 billion US dollars and the decline continues every minute;
- only 3-6 crypto-currencies from TOP-100 have been in positive territory in the last 24 hours, fluctuating between positive and negative zones;
- only 16 crypto-currencies from the TOP-100 fell by less than 20%, for the remaining coins the drawdown already amounted to 20 to 50%;
- the share of bitcoin in total capitalization dropped from 58% to 45% in the last 3 days;
- the top 10 crypto currencies dropped from 25 to 40%.
It is possible that this correction is temporary, and the market will return to its previous state, as it was with bitcoin in 2013. The reasons for what happened are much more interesting, and I will share my version below..
Can the exchange hacks be a part of a plan?
The talk that something weird is happening on the crypto currency market has been around for a long time, but the situation reached a critical point in November-December. Capitalization of the little-known Tether currency for November-December increased from 494 million to 1 232 million US dollars. On December 14-15, in just 24 hours, the Bitfinex exchange supported Tether's issue for $180 million, which were used to buy TOP-10 crypto currencies. The amount is not very large in comparison with the total capitalization, but it is very indicative of how quotations are manipulated. Interestingly, in early December, representatives of Bitfinex still made an official statement, in which they did not give a direct answer regarding the uncontrolled unsecured issue of Tether and the purposeful drive-up of bitcoin price.
If Bitfinex's problems are only just beginning, two other crypto-exchange exchanges are already in it deep. On December 19, the South Korean stock exchange Youbit was hacked, after which the representatives of the exchange announced its bankruptcy. Representatives of the exchange did not share how it became possible, indirectly blaming North Korea, which allegedly wants to establish control over bitcoin using extortionists viruses and website hacks.
A few interesting facts about Youbit:
- Youbit and Yobit are two completely different crypto exchanges. Yobit may not be included in the TOP-10 stock exchanges of the world, but its name is often mentioned next to Poloniex and Kraken. There is no information on the Youbit turnover, and on the trader forums it is compared with an exchange office. Can such a fortunate coincidence of names be an accident?
- as a result of the attack of hackers, the platform lost about 17% of assets (the exact amount has not yet been named). The exchange was already attacked in May 2017, then hackers managed to withdraw 3,816 bitcoins worth more than $5.5 million at the rate at that time. Each investor who keeps coins in Youbit wallets lost about 36% of the money;
- the representatives of the exchange said that they intended to return to users about 75% of funds nominated in the fiat South Korean currency. This immediately became the reason to assume that in fact, there was no hack, and the exchange is just trying to justify the scam.
Coincidence or not, but it was on December 19 bitcoin showed one of the biggest drawdowns in the last month.
The next serious correction of bitcoin occurred on December 21. By coincidence (and maybe not), another crypto exchange, EtherDelta, announced problems on the same day. According to the developers, in September hackers created a fishing website (a website that is a visual copy of the original), in which there was malicious JavaScript code. And this event could go unnoticed (losses amounted to only a few thousand US dollars), if there more cases of hacks of exchanges and the sudden New Year's collapse of the crypto currency market did not occur.
What is really going on the crypto currency market?
Whether the bankruptcy of the South Korean Youbit really caused the collapse of the bitcoin or not is a controversial issue. Bitcoin capitalization is slightly more than 200 billion US dollars - this is nothing compared to the stock market. The less capitalization of an asset, the easier it is to manage it. For example, about 20% of BTC are in the hands of the top 100 investors.
In trading circles, the manipulation of the price of an asset is called pump and dump scam. The pump scheme looks like this:
- A large investor invests money in an asset so as to move up its price. The limits of the permissible price fluctuation are set in advance;
- According to a scenario developed in advance, information is slipped to the media (on forums) that will explain the reasons for the price increase and will encourage simple investors to invest money. They are called "hamsters";
- At the peak of the first pump wave (upon reaching the upper boundary), a large investor applies any methods to consolidate the correction, up to a partial sale of the asset. Their task is to maintain the hamsters’ trust in the crypto currency and calculate the optimal amount of drawdown (the lower limit). Hamsters, confident in the prospects of the coin, actively buy up the asset at the bottom of the correction, thanks to which a new peak of the second pump wave occurs. The large investor sells an asset, starts a dump. The number of waves and the height of the peaks depend on individual factors: the popularity of the coin, the price, etc.
This is what it looks like through the example of Quark/QRK:
We can see that a little-known coin suddenly showed 2 peaks, the second slightly higher than the first (two pump waves), then returned to its original level. Something similar is happening now with other crypto currencies, only on a more hidden scale and with less explicit waves.
One of the versions of the last days’ events on the crypto currency market: a large game of a pool of institutional investors playing a pre-conceived scenario before the New Year. The participants of this pool are the developers of crypto currency, the owners of exchanges, large holders of coins. Let me remind you that Bitfinex did not recognize its connection with the Tether project for a long time. And the alleged hacking and the statements of high-ranking officials are nothing more than information for manipulating the minds of ordinary investors. This means that we will not see a major collapse (bubble blowing) yet – crypto currencies will simply not fall below the planned level. But it also means that a large hamster-cutting has already begun.
Conclusion. The crypto currency market is fraught with a lot of oddities. Its main problem is the absolute lack of control and transparency. Exchanges can easily issue a crypto currency and swing the course. They can easily bankrupt themselves and investors are unlikely to find out whether this was a deliberate bankruptcy. Online wallets can refuse the withdrawal of fiat money with impunity, drawing any numbers on their websites. Large institutional investors manipulate the course at their own discretion. Are you a novice investor and are you still hoping to make money on crypto currencies? Do not rush, it's better to start small - learn more about trading before you get involved in this game.
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