In the early days of 2018, many investors were alarmed by the price drop in bitcoin and their perturbation was understandable when you take into consideration the events of the previous year, at least when they were examined on the large scale. Bitcoin had enjoyed a wildly successful in 2017, with great price rises and an avalanche of mostly good publicity. It even saw the introduction of futures trading in the oldest and most famous of the cryptocurrencies, along with increased markets for trading. People spoke of the success of bitcoin being inevitable and on the back of all these many first-time investors in virtual currencies dipped their toes into this market.
It was these investors who were most troubled by the price fall in bitcoin in January of 2018. To them, the price fall seemed inexplicable. More experienced investors in bitcoin were perhaps less concerned by the phenomenon because they were used to the inherently volatile nature of the cryptocurrency. Even during the halcyon days of 2017, there had been sudden and hefty price spikes and dips. This behavior has often been noted in bitcoin; indeed, some investors took advantage of this facet in bitcoin’s behavioral profile.
The sort of investor who uses gold as part of a portfolio, banking on the way that the precious metal differs from normal equities to balance their investments would not be unusually worried by the end of bitcoin’s price rise. Indeed, this was one of the reasons why they bought the cryptocurrency in the first place. As we have noted the concern about the price drop was more common among those who had recently climbed aboard the bitcoin bandwagon and with this, we perhaps come to one of the answers to the question posed in the title of this article. The reason the price of bitcoin dropped was that of simple financial gravity.
The price of bitcoin depends, to a large extent, on the confidence that is present among its investors. There is nothing unusual about this since confidence is an important factor in the performance of stocks, shares, and commodities of any price. However, bitcoin, a virtual currency which is mined by a computer, is especially sensitive to the groundswell of public opinion. Some cynical observers evoked past bubble markets, such as the infamous tulip mania of seventeenth-century Holland, when the price of the bulbs soared by 1000% in a month. Others evoked the pseudo-rule of ‘bigger fool theory’, which states that you can buy high and sell higher providing the ‘bigger fool’ of the name is present to keep up the buying chain. This is a rather cruel and unflattering description, but it carries within a kernel of truth, and also an explanation for the price drop. The continuous rise based, for the most part, on good feelings and optimism must come to an end eventually. In terms of the gravity theory, what has gone up is bound to come down as excitement dies away. The cynics might remark that the ‘bigger fools’ have wised up.
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