Bitcoin Crash Eerily Reminiscent of Past Events
In spectacular fashion, a Bitcoin crash has taken place, falling over 25% in U.S. dollar (USD) terms and over 30% versus the Chinese offshore yuan (CNH) on Monday, before recovering off of the lows.
Analysts are quick to blame profit-taking as a primary catalyst for the Bitcoin crash, with exchange watchers noting that selling pressure was solidly building below Bitcoin’s previous high of $1,165.89 on November 30, 2013. At noon EST on Monday, the leading cryptocurrency was trading at $891.82, down over 23% from the 2013 high.
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Certainly, Bitcoin was due for a sharp pullback after increasing in value almost unobstructedly since its late 2015 breakout from the low-$200.00 range. Unsurprisingly, this move coincided with the Chinese offshore yuan devaluing over 11% during that stretch, while a near-record $207.0 billion flowed out of China during the third quarter of 2016. The strength of the USD is not making the Chinese outflow situation any better, and the expected U.S. interest rate hikes in 2017 are expected to keep pressuring the yuan. (Source: “Barclays: China capital outflows at ‘near-record’ levels,” Business Insider, December 2, 2016.)
For Bitcoin investors, the price action is eerily similar to events seen three years ago. Back then, as Bitcoin was undertaking a spectacular ascent, smashing through new highs and briefly coming to parity with gold, a dramatic sell-off occurred. After touching an all-time high of $1,165.89, Bitcoin proceeded to shed 27% of its intraday value between November 30 and December 1, 2013. This was just a foreshadowing of the sell-off to come.
After a brief rally, which saw prices retest the high, the selling resumed. Coinciding with a People’s Bank of China (PBoC) crackdown on commercial banks dealing in Bitcoin, in a three-day period between December 4-7, 2013, Bitcoin’s value more than halved from the mid-$1,100s to the mid-$500s. It was a spectacular descent, which led many critics to proclaim the death of Bitcoin as a true, stable store of value.
What happens next is anyone’s guess. On the one hand, augmented per-minute trading volumes across all major exchanges, combined with a gradual reduction in price volatility and adoption metrics, suggest that Bitcoin may see enhanced price stabilization—and perhaps an increase to new highs—this time around. (Source: “Bitcoin Freefall: Prices Drop Nearly $200 in 1 Hour,” Coindesk, January 7, 2017.)
However, if the Chinese government moves to restrict Bitcoin exchanges from moving cryptocurrency to platforms outside China and to impose hard quotas—like they have already done on yuan exchanges—this could exert sustained heavy selling to the downside. It’s a case of “buyer beware” at the moment. (Source: “China’s new rules on cash transactions not capital control: expert,” ChinaDaily, January 3, 2017.)
In light of the Bitcoin crash, most investors may elect to take a wait-and-see approach with the world’s most-adopted cryptocurrency. All eyes will be fixated on whether the Chinese government chooses to extend capital controls to Bitcoin exchanges in response to yuan devaluation versus the U.S. dollar. Considering that Chinese buying makes up a predominant portion of trading volumes, the decision whether to laissez-faire or not is a critical one.
