Bitcoin prices have been reeling, hitting their lowest levels since October 2013. The scale of loss has been the sharpest since April of last year, when China fears set the market off on a selling frenzy.
The question this time around is: With prices already hovering near one-year lows, why have they plunged so far, so quickly? DC Magnates surveyed the industry for their take on the matter.
Jaron Lukasiewicz, CEO, Coinsetter
Coinsetter is a New York-based bitcoin exchange that recently launched short and margin trading offerings. Lukasiewicz explained:
“While our background channels haven’t been able to confirm a direct source of the selloff, we believe some individual or company may have been carrying too much BTC inventory with near-term USD expenses due. The effects of margin trading have exacerbated the downward price movement further.”
Typical examples of entities with “too much BTC inventory with near-term USD expenses due” are mining companies, which have to overcome large capital investments as well as fixed expenses. These may now include CoinTerra and CEX.io, both experiencing financial difficulties.
Greg Mazzeo, CEO, Exgate
Exgate recently unveiled its comprehensive end-to-end bitcoin trading solution for brokers.
Mazzeo also mentioned miners, who are “piling on the sell side” as a factor in pressuring prices downward. More importantly, he believes, is the role of short sellers:
“Even though it is a great business model, it is truly detrimental to the proper development of fair pricing. In the equity market, short selling is a necessity for price efficiency because the daily volume can absorb and sustain such practices. In a thinly traded market, short selling abuses can easily manipulate pricing downward which I believe is the major reason for the decline.”
He added that incidents like the Bitstamp hacking have shaken investor and industry confidence.
Mazzeo does not buy into the theory that merchants accepting bitcoin and, once having it, immediately converting it to fiat contributes significantly to price declines. He explained that typical purchases are small, and their effects can be easily compensated by new investors entering the bitcoin space.
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Garrett Jin, COO, BitVC
All experts agree that margin trading has played a significant role in exacerbating price declines. The liquidation of positions through margin calls accelerates price declines, instilling fear and panic among traders.
BitVC is Huobi’s futures trading platform. Jin observed a new turning point as prices hit ￥1,300 ($210), when there was a noticeable uptick in the fear factor. He explained:
“We cannot say specifically what is the cause of this sharp sell-off, except to say generally that fear begets more fear, fueling a feedback loop. In a market like this, our primary concern as an exchange is to focus on our platform’s risk control system to protect our users.”
Several months ago, BitVC absorbed losses during a fast market when it couldn’t close out a large, under-margined position in time. The exchange has since been working on improved controls to prevent such incidents from reoccurring.
Guy Nadav, Co-founder, AlgoBit.org
While there is some consensus as to the underlying driving forces for the sell-off, one can’t help but wonder about the sequence of events setting it off.
AlgoBit employs algorithmic strategies for bitcoin trading, drilling down to the nuances not usually noticeable to the naked eye. Co-founder Guy Nadav believes the events from the past two days developed as follows:
“The price drop of January 13th seems to originate from a large disposal of Bitcoin in Bitfinex. It started at around 00:30 GMT and within 2 hours the price dropped over 5% with a circulation of over 10,000 BTC. The other large exchanges (Bitstamp, BTCe, OKcoin) quickly followed that trend (arbitrage bots).”
Bitfinex is believed to be the “pin” to have “popped the bubble” based on observation that it had a slight head start in the downward trajectory, possibly by a few seconds.
The proposed sequence is predicated on the assumption that USD-trading on one of the top exchanges (by volume) was indeed the catalyst for the rest of the market.
He added that once the selling got under way, some individuals dumped large quantities, either to intentionally depress prices or to cash out on their value.