On Tuesday, 24 September, the price of Bitcoin dropped by 18 percent – the largest intraday drop in the cryptocurrency’s price since January 2018. The price of Bitcoin has since stabilised, but the size of the drop has sent shockwaves through cryptocurrency exchanges across the world.
According to Marius Reitz, General Manager for Africa at Luno, “There have been a number of theories put forward for the loss in value of Bitcoin. However, it is important that we don’t lose sight of the main factors that led to the drop. In understanding these factors, we will be better positioned to take the necessary steps to ensure Bitcoin and other cryptocurrencies fulfil their potential as an effective way of storing, maintaining and exchanging value.”
There are three main factors that we believe to have led to the price drop:
1. Negative sentiment is affecting all asset classes – The main reason for the drop has been the negative sentiment across all markets caused by the global geopolitical news flow. This has impacted all asset classes and has happened at a time of low liquidity which has led to volatility. When there is more liquidity and markets go risk-off there is still money going into safe haven assets, gold, yen, etc. As Luno has commented previously, these investors have often placed a small amount into Bitcoin as a hedge. But even safe havens are struggling to find buyers. Bitcoin dropped on 24 September and gold dropped on 25 September.
2. Potential impact of new Bakkt exchange – There could have been a link on the 24th with the start of Bitcoin Futures trading and physical settlement on the ICE-backed Bakkt exchange. This could have further reduced liquidity but the main down was almost certainly a function of the overall market sentiment.
3. New asset classes can be more volatile – Cryptocurrencies are a new asset class, so there will always be a higher level of volatility compared with traditional trading. However, as the benefits (especially to developing markets which are disadvantaged by traditional financial services systems) become clear, more people and businesses will hold the coins for their utility value. This will reduce speculation and volatility. As regulation is introduced and the functionality of the coins increases the true price will become more consistent.