Why Cryptocurrencies Keep Bouncing Back

08-Jan-2018

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Late Saturday, bitcoin traded near $15,600 according to Coindesk. About 12 hours later it traded around $12,900, a drop of 17%. Since last Monday bitcoin was down about 30%.

The good news is that since Saturday’s low, bitcoin has regained about 11% of its loss since Sunday. Watching the price of bitcoin could give a person whiplash.

If bitcoin and the other cryptocurrencies were traded like equities or commodities or even gold, then we’d expect to see sizeable gains followed by a correction that retraces part of the recent gain. But the cycle is usually longer than a few days or a week.

In late November, CoinMarketCap.com reported than some 1,274 cryptocurrencies had a market cap of $283 billion. A week later the total market cap was $333.82 billion and total market cap rose another $50 billion the week after that.

On December 17, the total market cap of 1,325 cryptocurrencies rose to $590.2 billion and a week later the total had dropped to $566.17 billion. Bitcoin accounts for 57% of the total and Bitcoin Cash accounts for another 9.2%.

For the past seven day, bitcoin prices have dropped nearly 24% while Bitcoin Cash prices have risen more than 54%. Another popular cryptocurrency, Ripple, is up 42% in the last seven days while Ethereum is up just under 7%.

The price of bitcoin and the other cryptocurrencies is volatile because none has an agreed upon fundamental value. A barrel of oil or an ounce of gold has a price backed by a physical asset. When there is no such asset, something like bitcoin is worth what people think it’s worth.

And most people think the value will go up, so speculation is the fuel the drives the bitcoin bus. With futures trading now available for bitcoin there is some expectation that short sellers might take some of the wind out of bitcoin’s sails. But without a physical asset, shorting bitcoin is exceptionally risky because, as with any short bet, risk is unlimited and bitcoin’s volatility means a swing from low to high can happen virtually instantly.

Since beginning to write this story about 30 minutes ago, bitcoin has added more than $400 to trade at around $14,600, up 2.8%.

Why Cryptocurrencies Keep Bouncing Back

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