Navel Gazing: Why Bitcoin Prices Dropped Earlier This Year

Navel Gazing: Why Bitcoin Prices Dropped Earlier This Year

May 14, 2018

Bitcoin and other crypto currency prices dropped a lot earlier this year. In real-time, speculation abounded about if this was a bubble bursting. We now know that did not happen. CoinDesk’s State of Blockchain Q1 2018 retrospectively examines several theories about the last quarter’s price movements. Overall, they found that a drop speculative activity on exchanges was the main culprit. A sell-off to pay taxes and a change in investor’s long-term outlook were likely not the causes.

Even after falling from Q4 2017’s all-time highs, bitcoin prices dropped more than 50% in Q1 2018 but have now stabilized and are trading between $8,000 and $10,000 USD over the last month. For the purpose of its analysis, CoinDesk focused just on bitcoin because most other coins’ prices are highly correlated with it.

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CoinDesk found that December 2017’s plunge happened at the same time as the volume of bitcoin transactions dropped in comparison to the volume of off-chain trading on exchanges. In Q1 2018, the volume of on-chain transactions kept on dropping and then held steady at about 200,000 a day. Measured in the value of bitcoin transactions, the volume of on-chain transactions continued to decline.

CoinDesk’s analysis assumes that all on-chain transactions are for actual purchases, so its report says merchant of acceptance of bitcoin is “tepid”. Strategic Coin’s review of merchant’s use of bitcoin also indicates that some early adopters are taking a pause; however, overall acceptance of bitcoin will continue to grow as third-party vendors enable its use. Furthermore, the drop in the net value of on-chain transactions mentioned may because of the actions of a few larger investors. These investors may have started to conduct crypto transactions via financial institutions that finally started to provide sophisticated bitcoin services.

Is the US Tax Man to Blame for the Bitcoin Drop?

In March and April 2018, industry pundits speculated that bitcoin’s price was facing pressure because people were selling off digital assets to pay capital gains taxes in the United States. CoinDesk dismisses this claim by noting that the taxes owed were only 20% of the total decline in bitcoin market capitalization.

Survey Data

A survey of 420 CoinDesk reader provides another perspective on the recent price volatility. Conducted in late April and early May, the CoinDesk Sentiment Survey found that 69% thought crypto prices were undervalued at the end of Q1 2018.

When asked specifically about what caused the price declines, 43% said it was due to prior over-speculation. The second most cited reason was regulation; however, half as many (22%) felt strongly that this was the reason for the price drops.

Strategic Coin is a premier provider of market and sector research, strategic consulting and token launch services to the blockchain industry. Its Viability and Strategic Assessment (VISTA) Reports are backed by comprehensive due diligence and extensive time spent with company management. VISTA reports aim to be the most authoritative and thoroughly vetted view on a project’s long-term potential.