Analysts struggle to understand broad selloff of virtual currency
The value of bitcoin slipped on Monday below $5,000 for the first time since October 2017 as a broad selloff gathered steam on the opaque cryptocurrency market.
Data compiled by the Coinbase digital exchange showed the world’s most popular virtual currency losing 12.5 percent of its value from Friday evening to stand at $4,914.21 by 7:30 p.m. GMT on Monday.
The rout began on Wednesday and has also affected widely-traded other cryptocurrencies such as ethereum and ripple.
Bitcoin opened trading on Wednesday at $6,326 and has since seen its market capitalization fall to less than $90 million for the first time in over a year. The still-nascent sector is not completely transparent and analysts have struggled to understand what precisely prompted the latest drop.
At least some of it has been attributed to a battle for control of a smaller crypto operator called bitcoin cash. That currency has split in two—a process traders describe as a “hard fork”—and who owns it at the moment is not entirely clear.
Bitcoin cash was down around 20 percent on the day.
The confusion has highlighted what analysts have been warning for some years: crypto trading is too unregulated and risky to be considered a safe investment for the public at large.
Bitcoin has suffered a painful year of declines from its all-time high of $19,511 in December 2017. Some of the currency’s problems have been attributed to its business model.
Bitcoins are created through a process called computer “mining.” This essentially involves using massive banks of interconnected processors to solve complex math problems. The computations get progressively harder to crack the more bitcoins there are on the market. The electricity costs involved grow as a result. One market estimate made last month put the cost of mining one bitcoin at $7,000. This means market players are currently creating new coins at a loss.
Traders had been hoping to get a big boost with the approval by the U.S. Securities and Exchange Commission (SEC) of a bitcoin exchange-traded fund (ETF). The investment instruments essentially operate as a stock that closely tracks each bitcoin’s market value.
ETFs are one of the most popular trading mechanisms and the SEC’s green light would give the bitcoin market a massive infusion of outside cash. But the SEC has thus far balked out of concerns about fraud.
Some of the losses since Wednesday have also been linked to a warning from the accounting group KPMG last week about the dangers of viewing bitcoin as a real currency. “To fulfil the requirements of ‘store of value,’ cryptocurrencies must be much more stable,” the KPMG report said. “Extending credit in a currency that risks significant devaluation or borrowing if the value appreciated beyond the borrower’s ability to pay would be a fool’s errand,” said the report.