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I think it may be months before the narrative around this get formed with any sort of certainty. However, here are the theories I read and saw yesterday that seem to shed a light on what was goingĀ on.
More New, Amateur Investors Exaggerating Rise andĀ Falls
So, the macro-trend in cryptocurrency over the last few months has been growth like weāve never seen. Binance, one of the fastest growing exchanges, added 250,000 new users in oneĀ hour[1].
Many of these users were completely new to cryptocurrency and hadnāt experienced a rise or crash. So they contributed to both the extent of the rise and fall. We rose from $300 Billion to over $800 Billion because of these investors, so dropping to close to $400 Billion due to the same investors is reasonable. They got excited and then scared, tanking the market. I think there are more specific answers to go into, but I think this explains why this year was so dramatic.
The JanuaryĀ Dip
The most common explanation for why the dip took place was that in mid-January every year since 2014, there has always been a sudden 20% to 30% dip. You can look at this Reddit post for more discussion on this topic[2], but hereās the graphic they produced:
Personally, this looks like people selling off investments for tax purposes, and then the market āover-reactsā to the negative move. This year, we have a lot of unseasoned investors who are just riding the wave, so January 2018 looked likeĀ this:
Quite the dip, but not inconsistent with previousĀ years.
Bitconnect Failing
Bitconnect wasnāt the biggest player in the cryptocurrency market by any means (less thanĀ .3% of the cryptocurrency market total), so it didnāt contribute much to the drop in value. However, the news of Bitconnect finally pulling out of US operations hung like a shadow over the entire day. A lot of social media promoters basically went into file shredding mode to get rid of all the evidence that they had promoted the PonziĀ Scheme.
A more mature group of investors might have taken this news and shrugged, but given the high level of inexperience traders, Iām sure many investors saw what was happening here and took it as a bad sign for the market overall. The news of Bitconnect pulling out hit the market around 20:00 UTC on JanuaryĀ 16th:
And here was the overall cryptocurrency market around the sameĀ time.
I think that $75 Billion valley over the next few hours was directly caused by the news about BCC. Again, I donāt think this was the predominant cause of any of the crash (it was already melting down), but it certainly seemed to accelerate things.
Footnotes
[1] Binance: 250,000 users subscribe to the exchange in 1Ā hour!
[2] The January dip happens every year. Lunar new year costs money, just hold tight. ā¢ r/ethtrader
Originally published at www.quora.com.
What Caused The Cryptocurrency Sell-Off on Tuesday, January 16th? was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
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