Top Three Theories Explaining The Cause of The Cryptocurrency Market Crash

Almost all major cryptocurrencies fell on Tuesday and the market slump has extended into Wednesday. The combined value of the more than 1,400 cryptocurrencies in circulation has fallen to about $460 billion on Wednesday from over $800 billion at the start of January, data from CoinMarketCap.com shows. The cryptocurrency market has lost $340 billion of value since the start of January, with a massive slump in price causing a huge sell-off on Tuesday (16th of January) and Wednesday (17th of January). Bitcoin on Wednesday dropped below $10,000, almost 50% below its December peak, as the cryptocurrency market entered the second day of a sell-off. The causes of the sell-off are quite ambiguous, with several theories making the rounds. Here is a summary of what analysts and market participants are saying about the crash in the prices of cryptocurrencies.

Theory

The most popular theory among market commentators is that fears about a regulatory crackdown in Asia are driving the sell-off."The sell-off comes amid concerns of fresh crackdowns on virtual currencies by the South Korean and Chinese government and as governments across the globe are struggling at how best to regulate bitcoin," Fiona Cincotta, an analyst with City Index, said in an email on Wednesday. Fawad Razaqzada, a market analyst with Forex.com, also said in an email on Wednesday: "Cryptos have been held back in recent days amid increasing levels of scrutiny from regulators, most notably in South Korea, where the government is planning to clamp down on trading in virtual currencies.

The justice ministry is apparently working on a bill to ban cryptocurrency trading through exchanges. If the bill is eventually passed by the National Assembly, it would be very bad news, given that South Korea is the world's third-largest market for cryptocurrencies. The uncertainty is weighing on investor sentiment."Aside from South Korean regulatory pressure, Russia is also signalling that it could crack down on cryptocurrencies. Russian President Vladamir Putin said "legislative regulation will be definitely required in future" for cryptocurrencies. FXPro said in its daily client email on Tuesday that "the market seems overwhelmed by rumors regarding a complete currency ban in South Korea and the prohibition of mining in China due to high electricity consumption. What's more, it was today reported that Chinese financial authorities plan to block domestic access to cryptocurrency trading platforms," it added.

Theory 2: Futures theory

Perhaps the wildest speculation about what’s pushing the cryptocurrency pile-up is that the sappy of the first bitcoin futures contracts is to blame. Cboe and CME Group both introduced bitcoin futures contracts in mid-December, permitting institutional investors such as sidestep supports to speculate on the destiny cost of the digital currency. The first bitcoin contracts, which are cash-settled, grown on Wednesday. The contract’s allotment cost is dynamic by a cost auction on the Gemini sell at 4 p.m. on Tuesday. Some people are speculating that aggressive selling activity could have been used to drive down the price of bitcoin on the exchange and turn the futures contracts into winning bets."Back-of-the-envelope calculations ... suggest that as little as a million dollars could be used to shore up futures positions and influence the auction market," said an EthNews report by Matthew De Silva on the theory.

Theory 3: Market Overheatin

Bertani thinks the biggest cause pushing the pile-up is the market overheating. Bitcoin rose by over 200% from Oct to December as outrageous numbers of new investors poured money into it. Other cryptocurrencies rose alongside bitcoin, and many market watchers argued that this created unsustainable bubble-like marketplace conditions. The new crashis just some of the atmosphere entrance out of the bubble, Bertani says. “The last year has seen once again a large expansion and hype cycle (like it did already several times before) which needs to go back to normal after the stream hype has reached the peak,” he said. “This is most approaching what is going on now.”Bertani also added, saying: “The supposition of South Korea banning ryptocurrencies, more than a pushing factor, is really just an forgive for the marketplace to rest down for a little bit before stability with the continual growth. ”Pawel Kuskowski, the CEO and owner of Coinfirm, which provides cryptocurrency correspondence services, told Business Insider on Wednesday that it was “a correction, a long-expected correction.” “It was just for too long going up and up and up,” he said. “Ether, in two months, went up from $300 to $1,300. That’s absurd. Just crazy.”He added: “I think there are some positions that are being closed at the moment, but we don’t think it’s going to be a big negative impact. The improvement was quite indispensable because it was just absurd what was happening.