Shutterstock photo Bitcoin (BTC) is taking heavy hits, following last week’s spectacular drop. And it just seemed that the cryptocurrency was finally getting stable, too. So what happened? Let’s take a dive into CoinWatch’s numbers and find out.
The simple answer is, the bottom fell out. On Wednesday, Nov 14, Bitcoin opened at $6,326.
The next day, it closed at $5,598, a loss of 11.5% in just two sessions. At the same time, Bitcoin’s market cap slipped below $100 million for the first time in over a year; the currency is currently funded to the tune of $92.68 million, with a current trading price of $5,269. The leading crypto continues to trend downwards in trading.
The fuller answer is, no one is really sure what’s going on. Bitcoin’s fall of the cliff coincided with the runup to the ‘hard fork’ of Bitcoin Cash, as the spinoff itself spun off, forming two new coins last week. The new cryptos, Bitcoin ABC and Bitcoin SV, were implemented by software code on Nov 15, are differentiated mainly by technical aspects in the way new blocks are implemented.
The sharp losses were not confined to Bitcoin, as most of the crypto market quickly followed suit. Ethereum (ETH) and Ripple (XRP) have also posted large losses. ETH fell 14.
5% last Wednesday and Thursday, and has slipped a further 12% approaching the start of Monday’s trading. XRP lost 10.4% last week, but is has bounced back somewhat, and is up 6% in early trading. The crypto market has a whole lost 12% in the rout, and is down a further 3% this morning.
Two Key Numbers
So the losses are systemic to the cryptocurrency ecosystem. To find a cause, we’ll have to look deeper than the split in Bitcoin Cash. As we do, let’s keep in mind two important numbers: $7,000 and $6,000.
The first number has to do with the costs of mining Bitcoin.
The digital currency is not created out of thin air; rather, dedicated programmers set their computers to working out the equations of the next block in the blockchain, with the successive blocks getting harder to calculate and each one worth a reward paid in bitcoins. The catch, however, is the computing power required for the ‘mining,’ and the electricity cost of maintaining (and especially cooling) those dedicated servers. According to Tom Lee, co-founder of Fundstrat Global Advisors, it costs about $7,000 to ‘mine’ one Bitcoin .
It just so happens that $7,000 was just over the upper limit of Bitcoin’s recent stable period. From early September until last week, BTC traded in a narrow range around the $6,400 mark. Miners lost money on it, but traders were satisfied as that price indicated a bargain entry.
Last week’s cliff saw BTC crash below $6,000, and then keep crashing as traders started a selloff. Indications are, crypto traders had seen $6,000 as a support level, and preset their stop-losses at that price.
$6,000 is a nice, round number – just the sort that can become psychologically important in the trading markets. When BTC dropped through it, those stop-loss sell orders took effect and the selling developed a life of its own. eToro’s Mati Greenspan observes that investors may be “trying to play the breakout,” looking for a new floor now that their previous stop-loss has been broken .
It’s hard to believe now, but Bitcoin was at almost $20,000 less than a year ago.
The drop back down has not been as fast as the climb up was, but with last week’s collapse we’re starting to plumb new lows. We’ll have to watch the markets to see where the crypto goes from here.
Author: Michael Marcus
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc..
