Why the Crypto Market Crashed – It’s no secret that the crypto market has taken a beating over the past few months. Here’s a look at some of the reasons why.
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Introduction
It’s been a wild ride for cryptocurrencies over the past few weeks.
After hitting an all-time high of nearly $20,000 in December, Bitcoin tumbled below $10,000 last week before stabilizing around $11,000. Other major digital currencies like Ethereum, Ripple and Litecoin followed suit, losing anywhere from 20% to 50% of their value during the sell-off.
What caused this sudden market crash? Let’s take a closer look.
One major factor was the introduction of new regulations in South Korea, one of the world’s largest cryptocurrency markets. The South Korean government announced a crackdown on anonymous cryptocurrency trading last week, causing panic among investors. Prices fell even further after reports emerged that the country was considering shutting down cryptocurrency exchanges entirely.
Another factor that may have contributed to the market crash is the growing realization that cryptocurrencies are still hugely volatile and susceptible to sharp declines. Even though prices have rebounded somewhat from their lows last week, many investors are still feeling skittish about putting their money into digital currencies.
It’s also worth noting that the vast majority of cryptocurrencies are still far below their all-time highs. So while the recent market crash may have been painful for investors, it’s important to keep things in perspective. Cryptocurrencies are still in a very early stage of development, and it’s entirely possible that we’ll see more volatility in the months and years ahead.
The Mt. Gox hack
On February 7, 2014, Mt. Gox, a bitcoin exchange based in Shibuya, Tokyo, Japan, suspended trading, closed its website and exchange service, and filed for bankruptcy protection from creditors.[1][2] The company stated that it had “lost” 744,000 bitcoins of customer deposits and 100,000 of its own in a hack that took place in 2014.[3] A leaked corporate document claimed that the losses were due to a flaw in the software algorithm which had been exploited by an anonymous hacker.
Mt. Gox was founded in July 2010.[4] By 2013 and into 2014 it was handling over 70% of all bitcoin (BTC) transactions worldwide,[5] as the largest bitcoin intermediary and the world’s leading bitcoin exchange.[6][7][8] In February 2014 Mt. Gox suspended withdrawals citing technical issues.[9] By the end of the month these delays caused a flood of negative media coverage.[10][11][12] Bitcoin prices fell sharply after the suspension announcement with one exchange rate ticker even showing a loss of 91% in value compared to BTC’s price just prior to the announcement.[5][13]
Mt. Gox issued a press release on February 10, 2014 stating that “a decision was taken to close all transactions for the time being”, citing “recent news reports and the potential repercussions on MtGox’s operations”.[14][15] It remained offline for several days amid rumours that customers had lost their funds. Tweeting on February 23 CEO Mark Karpelès said MtGox had not gone bankrupt and that it was still trying to find a solution to its technical issues.[16] Days later Chief Marketing Officer Gonzague Gay-Bouchery resigned “to take responsibility for managing [the company’s] recent crisis”.[17][18][19]”
The Bitfinex hack
The hack of Bitfinex, one of the world’s largest cryptocurrency exchanges, in August 2016, is widely believed to have been a key factor in the Cryptocurrency crash that occurred in early September. The hack resulted in the theft of 120,000 bitcoins, then worth around $72 million. This was not the first time that Bitfinex had been hacked – it had previously been hacked in 2015, when 1,500 bitcoins were stolen.
The news of the hack caused panic among investors, leading to a sharp sell-off in cryptocurrencies. The price of Bitcoin fell by around 10% on the news of the hack, while Ethereum and Litecoin prices both fell by around 15%. These falls were part of a wider sell-off that saw the total market value of all cryptocurrencies fall from $67 billion to $58 billion over the course of a week.
The Bitfinex hack was just one of a number of bad news stories for the cryptocurrency market in early September. China’s crackdown on initial coin offerings (ICOs) was also a major factor in the sell-off. ICOs are used by blockchain startups to raise funds by selling new digital tokens to investors. The Chinese government’s decision to ban ICOs sent shockwaves through the cryptocurrency community, as many startups rely on ICOs to raise funds.
The combination of the Bitfinex hack and China’s crackdown on ICOs led to a perfect storm for the cryptocurrency market, causing a sharp sell-off that led to billions being wiped off the total value of all cryptocurrencies.
The DAO hack
The DAO hack was a major event in the crypto world. It caused a lot of loss for investors, and it also shook people’s trust in the Ethereum network. The DAO was a decentralized autonomous organization built on the Ethereum network. It was meant to be a way for people to invest in Ethereum-based projects without having to go through a traditional financial institution. However, the DAO was hacked, and about $60 million worth of Ether were stolen. This caused the Ether price to crash, and it also caused the Ethereum network to hard fork so that the stolen Ether could be returned to the investors.
China’s ICO ban
On September 4, the People’s Bank of China (PBoC) officially banned all Initial Coin Offerings (ICOs) in the country, stating that ICOs are illegal and disruptive to economic and financial stability. The ruling sent shockwaves through the crypto world, as China has been one of the most active markets for ICOs. In the month of August alone, Chinese investors poured $1.6 billion into ICOs.
The PBoC’s ruling is significant because it is one of the first major crackdowns on ICOs by a major regulatory body. Until now, ICOs have largely been unregulated and have operated in a legal grey area. The PBoC’s actions could set a precedent for other countries to follow suit and crack down on ICOs in their own jurisdictions.
The immediate aftermath of the PBoC’s announcement was a sharp sell-off in cryptocurrency prices. Bitcoin, Ethereum, and other major cryptos all fell by double-digit percentages in the days following the news. The sell-off likely reflects investor fears that tighter regulation of ICOs could lead to reduced demand for cryptocurrencies and put downward pressure on prices.
Conclusion
In conclusion, the cryptocurrency market crash was caused by a variety of factors. These include the Mt. Gox hack, the Chinese crackdown on exchanges, and the general speculation and hype around Bitcoin and other digital currencies. While the market has since recovered from its lows in early 2018, it remains to be seen if it can reach new highs in the future.
