Summary
Bitcoin hit a $3K high on 12-6 and went down near $2k today.
There are many factors playing a role in the decline but I identify one primary reason.
Will we ever see the Bitcoin high $3K again?
Wow, Bitcoin (COIN) took a rather spectacular dive since 6-12 but interestingly it's only down 18% since last week. There has been a FED hike, competing crypto currency Ethereum nearly overtook Bitcoin as the leader in market cap and there have been DDoS attacks on major Bitcoin exchanges. I believe the latter caused the sell-off.
Bitfinex, the largest U.S. dollar-based bitcoin exchange, reported it suffered a second DDoS attack on Wednesday after suffering one on Tuesday. A DDoS is a cyber attack that doesn't hack a website but can take it offline. It is notoriously hard to defend against as it requires a lot more resources to ward off as compared to setting one up. Earlier BTC-e also reported a DDoS attack. The major U.S. cloud wallet Coinbase reported downtime due to user growth. I can understand platforms may not want to talk about DDoS attacks or admit it fazes them.
It doesn't feel good to have Bitcoins or other cryptocurrency on an exchange which you aren't able to access temporarily. The direct result is that people pull funds and a percentage converts back to fiat. Perhaps a more important effect is that it screws up levered traders on exchanges like Bitfinex, Poloniex and others. Poloniex was hit May 8 but there are no reports it got hit this time. The margin often consists of funds drawn under a 2-day contract from other users. Both need to roll over their positions.
Lenders are not able to login so they can't roll over their funds which means there are hardly any funds available to the margined traders. Margined traders can't renew their lines and are forced to liquidate. This early in Bitcoins development exchanges play a major role communicating its price. Whereas for gold or the U.S. dollar, the market takes cues from real world events, as of yet the reverse is true for Bitcoin. The real world takes its cues from the exchanges.
With less liquidity due to the DDoS attacks, which shut off access to a number of exchanges - and many traders forced to liquidate at the same time - there was only one way for the price to go.
All traders on all exchanges are aware of DDoS issues and immediately understand the predicament the traders caught without access to their account are in.
The obvious trade is to short.
It is even possible, but not proven, that large malicious traders set up the DDOS attacks with specific intent to profit from the ensuing situation through major short positions.
Margined traders on an exchange that isn't accessible are screwed whether the exchange shuts down their positions automatically or they survive to do it themselves. With the momentum clearly swinging in the other direction, traders pile on and the results are on display at the start of this article.
Such volatility, in the "wrong" direction scares more casual early adopters, long term investors and those who use it in day-to-day trade. As volatility begets volatility Bitcoin and alt currencies could drop further and it wouldn't surprise me.
In the medium term I expect the exchanges manage to shrug off the DDos attacks, trading to become less volatile. And as time goes on, more people will increasingly understand the pros of cryptocurrencies while the negatives of the emerging technology slowly get dealt with as well. It may take a few months or years but we'll see Bitcoin $3K again.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have some exposure to various cryptocurrencies including Bitcoin and Ethereum.
Article By Bram de Haas
