The Global Pump and Dump
At the end of 2017, Bitcoin and other cryptocurrencies went through a huge explosion. On the 15th of December Bitcoin hit it’s all time high of $17,900 USD ($22,940 CAD). Since then the price of Bitcoin has quickly declined. As of writing this article, Bitcoin now sits at $8,200 USD ($10,510 CAD).
So what happened? Is cryptocurrency dead?
Let’s take a look at the underlying reasons as to why the market has taken such a huge turn.
Past to Present
To better understand the exponential growth of cryptocurrency as well as it’s epic drop, we must look at the past and compare it to our present. Looking back to May of 2016, Bitcoin started the month at $449.62 US ($580.45 CAD). In May of 2017 Bitcoin sat at $1,579.18 US ($2038.67 CAD). If you purchased Bitcoin in November or December of 2017, you are obviously frustrated by the downward spiral however if you look at the past couple of years, the growth has been tremendous.
As you can see in the chart above, at the beginning of May 2017, cryptocurrency as a whole went through a true bull market run for the first time ever. All of a sudden, it was all over the news and people started talking about the obscene amounts of returns. By the end of summer, the total market cap of cryptocurrencies grew from $37.8 billion dollars US in May to $176 billion dollars US in September. (The market cap is the total amount of money invested into cryptocurrency globally).
Financial experts had never seen this kind of growth before. Investors started dumping everything they had into cryptocurrencies. Exchanges offering easy ways for the general public to purchase cryptocurrencies such as Bitcoin (BTC), Litecoin (LTC) and Ethereum (ETH) began popping up overnight. One such exchange was Coinbase who created the first smartphone app that made it easy for anyone to enter their credit or debit card information and buy Bitcoin instantly. In December, Coinbase became the most downloaded app in the iPhone app store. People started borrowing huge sums of money from banks and took out second mortgages on their homes in fear of missing out on the craze.
On Sunday January 7th, 2018, Cryptocurrency reached it’s all time high at a total market cap of $824 billion US dollars. In the span of 9 months, the total market realized a growth of 2100%. Ripple (XRP), a cryptocurrency popular among banking institutions, saw a gain of 36,018% in 2017! An astounding amount considering we are talking about money but also realistic considering that cryptocurrency is traded on a global scale.
At the end of January, it became clear to seasoned investors that the ride was over. They were the first ones to start withdrawing their gains. This in itself accounted for much of the market cap. What is important to note is that financial markets are a zero sum game. If you make $1000 in the market – someone out there lost $1000. People who put all of their savings into the market had bills to pay so they started withdrawing. People who borrowed money and took out second mortgages started fearing losing it all and they started removing their money. After it was all said and done, many saw their portfolio shrink to 70% of their initial investment in December. Many ended up in severe amounts of debt because they invested borrowed money. This is why many banks and credit card companies have limited and outright banned the purchase of cryptocurrencies using borrowed money and credit cards.
What we are currently witnessing is the birth of a new financial market.