Bitcoin, Ethereum and other popular alt-coins have recently in the last week began to drop in value but many are left wondering why? First and foremost the drop in value was initially triggered by an alleged announcement by the Chinese authorities that they may target Bitcoin mining and other sectors related to the Bitcoin which initially lead to a small price drop however South Korea added fuel to the fire by announcing that it was also considering a complete ban on Bitcoin exchanges which lead to a further significant drop in value. The Bitcoin at its recent high had almost reached the $20,000 mark but now it hovers around the $12,000 mark. Why is this significant but not unexpected and how can one profit from the recent volatility?
Chinese and South Korean announcements
One of China’s top online regulators allegedly issued a notice to local Governments calling for an “orderly exit” to mining operations in China through the use of several different methods from implementing land taxes, limit electricity available for miners and so forth in an effort to shut down miners. This is a similar pattern that the Chinese Government is taking in line with its policy of clamping down on the Bitcoin and other cryptocurrencies as last year China announced bans on mainland Chinese based exchanges forcing them to shut down their operations in mainland China.
Despite Chinese regulations being largely expected and accepted by the community which lead to a very little impact on the Bitcoin’s price, the South Korean announcement that the Government was considering a ban on the Bitcoin was rather bit of a shock and a surprise for many particularly when South Korea was becoming more of a hub for research and development of cryptocurrency related technology. South Korea announced they would ban exchanges and impose strict penalties for anyone caught trading the Bitcoin.
Despite Japan’s policy being more favorable and it appearing to being open to adopting cryptocurrencies and blockchain technology the rest of Asia seem to be heading the other way in the form of regulations to tame the Bitcoin with Indonesia being the latest Asian country to do so as it announced similar but slightly more stringent regulations against the Bitcoin.
Why is this significant
China accounts for two third of hash power (mining power) generated globally and such a disruption in Bitcoin mining could be huge as less Bitcoins will be mined which will decrease the supply of the coin throwing the Bitcoin’s financial ecosystem off balance. In one scenario we could see the price of the Bitcoin increasing once all the F.U.D fades away as logically less supply and greater demand means a price increase. However on the other hand we could see panic selling continue for now by amateur traders before the bulls make an entry into the markets again.
Significant yet expected
For most experienced traders such a drop was eventually expected as looking back at previous chart patterns the Bitcoin usually see’s a dip and greater than usual volatility during January. Furthermore considering the Bitcoins massive price increase during the last few months of 2017 by doubling in value in such a short space of time, majority of professional traders saw a retracement occurring sooner rather then later.
Volatility equals profit
Due to the Bitcoin’s nature it is a lot more open to manipulation and F.U.D when compared to traditional assets such as currencies, stocks and bonds as it is a decentralized system which despite having its advantages in terms of buying and selling crytocurrencies, it also means cryptocurrencies including the Bitcoin also have vast amounts of volatility. One example we saw was during the hardfork SegWit2x being cancelled and a lot of misinformation and false statements created to manipulate the price of the Bitcoin to make it fall and to increase the price of Bitcoin cash in an effort to replace the Bitcoin.
Even though the price was initially manipulated and the Bitcoin cash’s price was inflated, the Bitcoin eventually managed to recover and made went onto make new highs. The smart traders who use the volatility to their advantage eventually end up making profits as opposed to those who fall for the F.U.D factor everytime there is a news announcement stating Bitcoin regulations which have so far appeared to be largely ineffective in terms of enforcement but effective tools for smart traders to make a quick profit. As the saying goes buy the lie and sell before the truth and this is what appears to be happening with the Bitcoin.