Ethereum dropped at a rate of 54% in March 2018 while bitcoin dropped by 38% during the same period of time. Since December 2017, the two cryptocurrencies have been on a downward roller coaster, plummeting by large numbers and only showing hopes gaining value rarely. The bearish market has extended to other altcoins as well, and investors are asking lots of questions.
Why is it happening?
The first quarter of 2018 hasn’t been good at all for most of the cryptocurrencies. From TRON losing three times its value in ten days after severe criticism to Ethereum losing half its value in three months; markets have been crashing. There are lots of arguments as to why it is happening. Here is a summary:
One of the most popular theories about the bearish market puts blame on governments regulating the industry throughout the world. China’s decision to stamp out cryptocurrency exchanges four months after banning ICOs had a severe effect on bitcoin. The country’s decision to also eliminate bitcoin mining added to the cryptocurrency’s woes.
The increasing concerns about the regulatory crackdown in different parts of the world have sent fears across investors, forcing them to redirect their funds back to regular investments. With a country that once controlled more than half of the industry’s markets aiming to end trading, the industry has to feel the pinch. China contributes to market trading immensely.
South Korea is also rumored to be pursuing measures to end cryptocurrency trading in the country. Such a move, in addition to the fact that governments around the world are also doing the same, has the ability to cripple the industry for a while.
Market correction after a crazy trading period
Although bitcoin’s and ethereum’s plummeting prices have been the focus of media lately, the bearish market has affected the whole industry. This is happening after a crazy trading period toward the end of 2018 and the start of 2018. Nearly all cryptocurrencies gained value during the period before everything started going south.
At first, speculators blamed the crash in market prices on future contracts– an increasing trend in the industry where investors buy bitcoin contracts aimed to help avoid losses in cases of unexpected volatility. But as more cryptocurrencies continue to lose value, the blame was shifted to the market correction.
What’s market correction and why is it important? After a lot of trading mainly driven by hype and lots of speculation, investors cash out their funds and the value of markets starts correcting themselves. It has always happened in the stock market; after a bullish market, the prices go down once again. Here is why the market correction is important.
- Makes trading becomes bearable- after speculative investment pushed bitcoin’s value to $19,000 in late December 2017, market correction helped bring the price back to a bearable $10,000 in mid-January 2018.
- Brings down overvalued cryptocurrencies- financial experts have often felt that some altcoins are overvalued, and it’s only through the market correction that their real value can be understood.
- Makes Trading Natural- trading cryptocurrencies would lose value if the growth curve was straight. A high growth rate succeeded by market correction brings normality to trading.
- Wrings out weak coins- with most altcoins having no real value, market correction easily stamps out useless cryptocurrencies from the industry.
Taxes in the US
The latest proposals on tax reforms in the US have scared a great portion of the US traders. New tax rules make it difficult to evade paying your bitcoin taxes. Conventionally, bitcoin traders could easily swap from one cryptocurrency to another without paying any taxes. With the new tax rules, any trading between cryptocurrencies will be taxable.
Since the tax rules are still new, cryptocurrency exchanges are yet to provide US-based traders with the forms required to enable taxation. At the same time, traders are still trying to analyze the new rules to understand which kind of trading could be exempted from the tax rules. Should trading Bitcoins for Bitcoin Cash get taxed? Amid such questions, some traders temporarily halted their activities.
In a way, confusion surrounding the US tax reforms has been blamed on decreasing trading activities by the US-based traders. However, given that some markets are dominated by countries far away from the US, this theory has not strongly convinced traders in general.
Effects of the Bearish market to:
Short term cryptocurrency traders are feeling the pinch of the bearish market. People who invested in bitcoins or ethereum in early January are yet to make meaningful profits. Across the cryptocurrency industry, very few altcoins have not dropped in prices in the last three months.
The only investors who are not so much worse off, are long-term traders with no plans to dump their funds any time soon. Investors who had plans to make profits off cryptocurrency in the first quarter of the year will now have to wait longer.
- ICO investments
The bearish market has had a real effect on ICOs. Ethereum is the most used coin by ICO startups. The ethereum platform allows startups to build decentralized applications and use smart contracts to execute trades. However, as ethereum’s prices go down, some startups have run to ethereum’s competition.
On the upside, the bearish market has reduced the number of traders who buy to dump their coins soon afterward. The current crop of traders is only interested investing for the long term, and this will help reduce fluctuations as well. Market liquidity may be low at the moment, but soon there will be a balance of trades, and fluctuation will be lower than it was several weeks ago.
To sum things up…
Although the ongoing bearish market has its bundle of benefits, it won’t stop the constant fluctuations associated with cryptocurrencies. Altcoins that attract low liquidity will continue to experience high volatility. However, major cryptocurrencies like bitcoin and ethereum could soon develop a more stable market.
For investors, the current state of the market isn’t likely to affect long-term investors. Bitcoin’s bullish trend could get back and other cryptocurrencies will tag along. However, nothing is guaranteed in the industry. If you plan to invest; exercise caution. Research extensively and only invest what you would have no problem losing.