Why Is Crypto Crashing? 5 Potential Reasons
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Introduction
Cryptocurrencies have been on a tear this year, with Bitcoin, Ethereum, and other major coins posting price gains of hundreds or even thousands of percent. But the good times came to a crashing halt this week, with the crypto markets plunging by billions of dollars in just a few days.
So what’s behind this cryptocurrency crash? Let’s take a closer look.
The Mt. Gox hack
On February 7th, 2014, Mt. Gox, a Bitcoin exchange based in Japan, stopped allowing withdrawals in US dollars. This set off a firestorm of speculation in the Bitcoin community that the exchange had been hacked. The price of Bitcoin on other exchanges quickly tumbled as Mt. Gox went offline altogether.
At the time, Mt. Gox was handling over 70% of all Bitcoin transactions and was the largest exchange by far. The hack shook the confidence of many early adopters and developers in Bitcoin’s ability to function as a stable and secure currency. The price of Bitcoin dropped from around $950 to below $450 in the weeks following the hack.
The China ban
The China ban was one of the primary reasons for the crypto crash in early 2018. China had been a major player in the crypto world, and when they decided to ban all ICOs and exchanges, the market took a sharp turn for the worse. The ban was a major blow to confidence in crypto, and many investors sold off their holdings in fear that the bottom was about to drop out.
The China ban was followed by a number of other setbacks for crypto, including hacks of major exchanges and regulatory uncertainty in key markets like the United States. These events combined to create a perfect storm that sent prices plunging across the board.
It’s still unclear exactly how far prices will fall before they start to recover, but many experts believe that we are still in the early stages of a long-term bear market. Only time will tell how this all plays out, but for now, it’s important to be extra cautious when investing in crypto.
The ICO bubble
The cryptocurrency market has been on a roller coaster ride over the past few months, and things took a turn for the worse in mid-January 2018. At the time of writing, the total market capitalization of all cryptocurrencies is down by over 50% from its all-time high reached in early January, and almost every major cryptocurrency is down by even more. So, what’s causing thiscryptocurrency crash?
There are a few factors that could be contributing to the recent sell-off. One possibility is that the “ ICO bubble” is finally bursting. ICOs (initial coin offerings) have been one of the biggest drivers of growth in the cryptocurrency market over the past year, as start-ups have been able to raise millions of dollars by selling their own digital tokens. But as more and more ICOs have hit the market, it’s become clear that many of them are little more than scams. And as investors have become wiser to these scams, they’ve become less willing to invest in new ICOs. This could be one reason why money is flowing out of cryptocurrencies and into other asset classes such as stocks and real estate.
Another possibility is that regulators are finally starting to crack down on cryptocurrencies. In particular, South Korea has been signalling that it plans to clamp down on cryptocurrency trading, and this has spooked investors. South Korea is home to some of the world’s largest cryptocurrency exchanges, so any restrictions on trading there could have a big impact on the market as a whole.
Finally, it’s worth noting that crypto prices tend to be very volatile, and this sell-off could simply be due to profit-taking after such a large run-up in prices over the past year. It’s also possible that we’re in for a longer-term bear market for cryptocurrencies, so it might be wise to stay on the sidelines until things clear up a bit.
The Bitfinex hack
On August 2, 2016, Bitfinex, the world’s largest Bitcoin exchange by volume, announced that it had been hacked and 119,756 BTC (worth $72 million at the time) had been stolen from customer accounts.
Bitfinex allowed customers to borrow money against their cryptocurrency holdings to trade on leverage. The hack caused many of these positions to be liquidated and resulted in a loss of $130 million for the exchange.
In the aftermath of the hack, Bitfinex implemented a number of changes to try to improve security and prevent future hacks, including:
-Implementing multi-signature technology for all customer accounts
-Introducing new security measures, such as two-factor authentication
-Carrying out regular audits of its platform by independent security firms
Despite these measures, Bitfinex was hacked again in April 2019 and lost 8,000 BTC (worth $61 million at the time).
Conclusion
In conclusion, it is still too early to tell why exactly the crypto market is crashing. However, there are a few possible explanations. First, the Winklevoss Twins may have sold off their holdings, which caused a domino effect among other investors. Second, the Chinese government could be cracking down on cryptocurrency trading, which has caused a decrease in demand. Finally, it is also possible that this is simply a correction after the recent bull run and that the market will rebound in the future.
