Sometimes known as ‘the king of cryptocurrency’, Bitcoin entered the market back in 2009 and has remained the world’s biggest (and most expensive) crypto ever since. But investor confidence was shaken sharply last week when the combined value of Bitcoin, Ethereum, Litecoin, Ripple XRP, and Chainlink crashed by a staggering $50 billion.
The cryptocurrency market is incredibly volatile, so this level of change – although discouraging – is not unprecedented within the industry. In this article, we’ll explore why exactly this crash has happened. Whether you’re a seasoned investor or someone looking for their first introduction to cryptocurrency, read on to find out more.
What Caused the Bitcoin Crash?
A Bullish Run
It hasn’t all been bad news for crypto markets this month. Back in late October, the price of Bitcoin climbed by a whopping 60% after PayPal announced that it would be adding the ability to pay in cryptocurrency to its platform. The increase in price meant that Bitcoin even started to approach its all-time high of $20,000, which it hit in 2017 but has never managed to achieve again.
This bullish run left many investors convinced that Bitcoin would match – or even exceed – this all-time high. However, the crypto market is often anything but stable and the rate of change that Bitcoin experienced in such a short amount of time ultimately proved unsustainable.
An asset’s price is dependent on supply and demand. As more and more investors rushed to add Bitcoin to their portfolios, the demand skyrocketed before coming back down to earth. As it did so, the price came back down with it – resulting in a sudden crash in value.
The Bitcoin Effect
This explains why Bitcoin lost value, but why did Ethereum, Ripple XRP, Litecoin, and Chainlink follow the trend?
According to analysts, the so-called ‘Bitcoin effect’ is a common phenomenon in the cryptocurrency market. Because Bitcoin was the first cryptocurrency, the majority of crypto investors hold BTC as well as their chosen altcoins. When confidence grows in Bitcoin, this is mirrored by increased confidence in a variety of other assets – especially big names such as Ethereum and Ripple (both of which are amongst the world’s top five cryptocurrencies according to market capitalization).
If Bitcoin rapidly grows or declines in value, it sets the tone for the market as a whole. This means that other cryptocurrencies are very likely to follow its trend on the price chart.
The Crypto Media
Another key factor that can influence the price of Bitcoin and other cryptocurrencies is the media. There’s a strong correlation between the number of mentions an asset receives online – especially if they come from well-known analysts or crypto companies – and its performance on the market.
Bitcoin’s recent spike was accelerated when an executive at the world’s largest asset manager, Black Rock, told CNBC that BTC would one day replace gold. Bitcoin has long been referred to as ‘digital gold’, but this comment from a well-respected figure caused a surge of investor interest.
Similarly, as soon as people started to notice that the price of BTC had stopped climbing, this interest began to crumble. A crisis in confidence caused demand for Bitcoin to fall further, resulting in the combined loss of $50 billion from the cryptocurrency market.
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