Why Is Bitcoin Crashing? The Causes Behind Bitcoin's Price Dip in 2017
As 2017 drew to a close, many cryptocurrency enthusiasts were left reeling from the sharp drop in Bitcoin's (BTC) price. A year earlier, BTC had been on an upward trajectory that seemed unstoppable, soaring past $20,000 at its peak. However, by November 2017, Bitcoin was experiencing one of its most significant crashes, losing over 60% of its value from mid-December to early January. This article explores the multifaceted reasons behind this crash, including regulatory scrutiny, market speculation, and technical issues.
Regulatory Uncertainty:
One of the primary factors contributing to Bitcoin's sharp decline in late 2017 was regulatory uncertainty. The year had seen a flurry of government actions related to cryptocurrencies, with countries around the globe taking varying stances on how to regulate these digital assets. In the United States, President Donald Trump's administration began considering whether virtual currencies should be regulated as securities under the federal Securities and Exchange Commission (SEC) or treated more like commodities under the Commodity Futures Trading Commission (CFTC). The uncertainty over which body would take charge led to a speculative frenzy among investors, leading some to sell off their holdings in anticipation of tighter regulations.
The European Union's position also played a significant role. In July 2017, the EU's financial markets authority, the Financial Conduct Authority (FCA), issued guidance stating that virtual currencies could be considered as 'financial instruments' under certain conditions, opening the door to potential regulation. This increased regulatory pressure added an extra layer of uncertainty and risk aversion among investors, prompting some to sell off their Bitcoin holdings in hopes of avoiding any potential future tax implications or regulatory fines.
Market Speculations:
Another factor that contributed to Bitcoin's decline was rampant speculation. As the year progressed, it became increasingly clear that a significant portion of Bitcoin's price surge was driven by hype and speculative trading rather than sound fundamentals. This led to a situation where many investors were motivated less by a belief in the long-term value proposition of Bitcoin and more by a desire to profit from rapidly rising prices through quick trades or investment schemes designed to leverage gains.
The speculative frenzy culminated with "Flash Loans," a novel but controversial DeFi (Decentralized Finance) concept that allowed users to borrow funds for brief periods without collateral. Some speculators used Flash Loans as a tool to pump and dump Bitcoin, buying it using borrowed funds in anticipation of an artificially induced price spike before quickly selling off their holdings to profit from the hype. This speculative trading contributed significantly to the eventual sell-off that led to Bitcoin's crash.
Technical Issues:
On the technical front, Bitcoin also faced challenges that exacerbated its market downturn. One of these was "SegWit2x" (Segregated Witness 2x), a proposed upgrade aimed at increasing transaction throughput on the Bitcoin blockchain by allowing blocks to grow twice as large as they currently do. However, this proposal sparked intense controversy among miners and developers due to differing views on how to implement the changes.
The ensuing debate culminated in a fork—a rare event that splits cryptocurrencies into two separate chains when different versions of their code are adopted by different groups of users or nodes. Bitcoin forked twice in December 2017, with one outcome being the launch of "Bitcoin Cash" (BCH) to address capacity issues without requiring all miners and developers to agree on SegWit2x. The second fork was a speculative attempt at launching a hard fork that would allow up to 8MB block sizes, but it failed to gain sufficient traction.
The forks not only added to Bitcoin's volatility by creating more supply of BTC (due to BCH's creation) but also sparked uncertainty among investors about the direction and future value of Bitcoin itself. This further fueled speculation, as traders and investors attempted to predict which fork would prevail or if there would be a hard reset that could potentially erase gains in both currencies.
Conclusion:
The crash of 2017 serves as a cautionary tale about the risks inherent in speculative bubbles within cryptocurrencies. It highlights how regulatory uncertainty, market speculation, and technical challenges can work together to destabilize even the most established digital assets. The Bitcoin price crash also underscores the need for a balanced approach to regulation that seeks to promote innovation while protecting investors from fraudulent activities and ensuring fair practices.
As the crypto industry continues to evolve, lessons learned from Bitcoin's 2017 downturn remain relevant. They remind us of the importance of fostering trust in cryptocurrency markets through transparent regulatory oversight, promoting education among investors about the risks associated with digital assets, and addressing technical issues that could threaten the stability of these innovative financial technologies.