Harry Hamburg – Exponential Investor (United Kingdom) –
If you’re new to crypto, the last few days will have been unnerving to say the least.
And even if you’re not new they will still have been unnerving.
If you haven’t seen the news, crypto markets lost over $300bn between Monday and Wednesday.
That’s a 42% drop in just two days. To put that into perspective, the crash that caused the Great Depression in 1929 was only a 25% tumble of $30bn ($396bn in today’s money).
The Great Depression lasted a decade. So, how long did this doubly-deep crash in crypto last?
That’s right. Since Wednesday’s low, at time of writing on Thursday afternoon, the market is up 41%.
It still has some way to go before it’s all the way back up. But it’s getting there, fast.
Of course, it may drop again before it goes back up. After all, this is crypto. But it’s likely to be trading over $700bn again very soon. Maybe even by the time you read this… if there hasn’t been another dip.
So, what the hell is going on? How can a $700bn market lose almost half its value in less than 48 hours… and then rebound just as fast?
Well, that’s what I’m going to explain today.
This time it’s different! No. It’s not.
Like most crashes in crypto, there is not one clear cause. There are a lot of contenders though. Any one of these factors could individually have caused a dip. But when combined together, they formed a crash.
Let’s go through them.
Reason 1: this happens every year
Every year, for the last four years running, there has been a crash in the middle of January. On the day of this year’s crash, Sam Volkering sent me this chart, which sums it up very well.
As we know, past performance is not a reliable predictor of future results in finance. Except, you know, when it is. And the evidence above is pretty compelling.
Reason 2: South Korean corruption
On Tuesday, I wrote about the whole South Korea regulation debacle and how the BBC was lying to you about it. If you missed it, read it here: proof BBC News is lying to you.
What’s come out of that story in the last couple of days is that the South Korean officials were insider trading on their own news.
As reported on bitcoin.com yesterday:
South Korean government officials have reportedly been caught insider trading. They sold all of their cryptocurrency holdings and profited just before the regulators announced crypto regulatory measures. The country’s Financial Supervisory Service is investigating the case.
Basically, these officials knew they could cause a market crash by putting out statements that they might ban trading.
So they loaded up on cryptos, sold them and immediately put out a statement about banning crypto trading. Did they then buy the dip? It seems likely, but we’ll have to wait for the investigation.
Reason 3: bitcoin futures contracts expiring
This one is definitely my favourite. It has all the elements in of a great film plot.
The best way I’ve seen this one written about was a post on Reddit. It’s so good, I’m going to repost it here in full.
Posted by gambletillitsgone:
The Biggest Heist Possibly EVER is Happening NOW!
- Early November it’s announced BTC will have two Futures Market.
- Shortly after the announcement Hedge Fund Managers along with the wealthy elite start buying up BTC by the billions in order to drive price up to ATH (19k) with the knowledge of knowing they would short the 1st BPOE future.
- First Future Market set at 15k
- Hedge Fund Managers start laddering sales of their now ATH BTCs making BILLIONS.
- These large sales slowly create panic and more people start selling. By this time The hedge funds guys are close to cashed out.
- Market takes a dump and the Hedge Funds Made Billions buying BTC Low and selling high while at the same time NAILING their short call on Future Market.
OK GREAT HEIST RIGHT? BUT WAIT THATS NOT ALL.
- Hedge Funds Managers and Wealthy Elite go LONG on BCME Future which is due 10 days after the first futures call.
- Market takes a complete nose dive back to 9k and gues who is their to start buying again? Thats right the Hedge Fund Managers and Wealthy Elite.
- With their newly made BILLIONS the Hedge Fund Managers push the price back up over course of 7 days in order to hit their LONG CALL on 2nd Futures market.
If you see a spike in the price of BTC and overall market cap after 1pm PST today (when 1st future call settles) you will have witnessed one of the greatest robberies of ALL TIME.
It’s pretty compelling reading isn’t it?
Yes, it’s a little shouty. And yes the poster is a bit of a conspiracy guy. But it does fit the timeline of events exactly. And fair play to the poster, they posted it before there was any sign of recovery and called the timing of it exactly.
Reason 4: all of the above
So there you have it. The three major events that caused the great (or not so great, really) crypto crash of January 2018.
These three events, combined with more “weak hands” (people who have invested money they can’t afford to lose) than ever resulted in a big market correction.
The question now is, what happens next?
Well, let’s take a look at what happened in the last crypto crashes. The below is based around the value of Ethereum, but it also translates to the wider market as a whole.
As you can see, this isn’t even the worst crash we’ve had in the last four months. Let alone the last year.
It may sound to you like I’m downplaying what’s gone on this week. But, the truth is, this is completely normal in the world of crypto.
Yes, old institutions like The Guardian were quick to jump on this crash and proclaim it was the end of bitcoin. As they love to do. But, as usual, they got it wrong.
Actually, the above Guardian article was particularly great. So it’s worth having a look at some of the best bits (emphasis mine).
As regulators in South Korea again signalled on Thursday that they were considering a ban on cryptocurrency exchanges, Capital Economics also dismissed claims that bitcoin and its imitators could replace established currencies as “rubbish”…
Its value was sitting at $11,560 on the Luxembourg-based Bitstamp exchange shortly after 2am GMT. Other cryptocurrencies include Ethereum and Ripple.
According to The Guardian, cryptos that aren’t bitcoin are simply imitators of bitcoin. It fails to understand there is a whole world of cryptos out there created to solve different problems. The vast majority of cryptos aren’t even aiming to be a currency.
Calling all cryptos imitators of bitcoin is like calling every company in the FTSE 100 an imitator of HSBC.
And “Other cryptocurrencies include Ethereum and Ripple”. What purpose does this mention serve at all? Ethereum is as different from bitcoin as a credit card is from a computer. But clearly the author has zero knowledge in this area.
(As an aside, if you want to know just how different they are, have a look at my article on DAG vs blockchain here.)
Don’t forget that cryptos are a massive threat to established institutions the world over. It’s in these institutions’ interests to downplay and discredit them.
However, I see this as a good sign. It shows the mainstream still doesn’t understand the revolution that’s going on here. And it means anyone investing right now is still early.
As I wrote here, blockchain will change almost every industry in the world. If you’re reading this now, you’re way a of the curve.
Lessons learned from the great crypto crash
What practical lessons can we take from the events of this week then?
The main, and most important one is:
Never invest money you can’t afford to lose.
Personally, when people ask me if they should put money into cryptos I tell them that if they decide to invest, they need to pretend they are throwing the money away. This is the only way to think about it.
If you’re only putting in money you can do without, you can afford to hold through the dips and not miss out on the rallies.
This is how you avoid being a weak hand and it’s your main line of defence against market manipulators.
It is the number one rule in crypto. And it’s the number one rule for a reason. You don’t want to be the person who bought into crypto on a credit card when it crashes 50% in a day.
I have covered the other main takeaways from crashes like this in a previous essay here. Please read it if you’re new to crypto or if you want to understand why these crashes seemingly come out of nowhere.
I’m writing a beginner’s guide to crypto
Over the next few weeks, I’ll be writing a series of essays all about buying, holding and trading crypto.
This “Beginner’s guide to crypto” will cover:
- How to start
- How to set up your portfolio
- A rundown of the different types of crypto
- How to buy and store crypto
- How to trade crypto on exchanges
- How to cash out your crypto
- Possible tax implications of trading crypto.
I’ll be writing one part a week, starting next Friday.
In the meantime, if you want to send me your biggest crypto questions, I’ll do my best to cover them in the guide: email@example.com.
I’m away in Estonia over the weekend and then I’m at London Blockchain Week on Tuesday and Wednesday. While I’m away, I’ve arranged for Frontier Tech Investor’s Eoin Treacy and crypto expert Sam Volkering to write some guest posts. Look out for them next week.
Editor, Exponential Investor