Over the past two days, the valuation of the cryptocurrency market has plunged to $201 billion as Bitcoin lost 13 percent, moving closer to its yearly low at $192 billion.
Since Sept. 6 when the price of Bitcoin dropped by more than 10 percent within a one-hour period, the cryptocurrency market has been on a continuous decline. Tokens bled out more intensely than they previously did in April and June, losing out 10 to 30 percent against Bitcoin.
$40 billion drop: One of the biggest daily decline in recent years
On Sept. 6, the cryptocurrency market lost nearly $40 billion from its valuation in less than 24 hours, demonstrating one of the steepest declines in the past three years.
Factors behind the drop:
The speculators have unnecessarily intensified the downtrend of Bitcoin by overselling Bitcoin in the global exchange market. The downward trend of Bitcoin has not changed since December of 2017, when the cryptocurrency market achieved a $900 billion valuation and initiated a rapid decline.
Analysts and investors in the cryptocurrency market and the broader financial market often attempt to find correlation in cryptocurrency price movements to developments in the cryptocurrency and blockchain sector.
However, correlation is not equivalent to causation, and because an event occurs at a certain time in which cryptocurrency prices fall or surge by a large margin, it does not necessarily mean that the event triggered a big movement in the cryptocurrency market.
TABB Group, an international research company, reported in July that the over-the-counter (OTC) Bitcoin is at least two to three times larger than the cryptocurrency exchange market.
Under the assumption that the OTC market is in fact two to three times bigger than the exchange market of crypto, developments in the cryptocurrency sector should have minimal impact on the price movements of cryptocurrencies — at least in the short-term — as the exchange market depends on the larger OTC market.
Reports have suggested that the correction of Bitcoin initiated on Wednesday was mainly caused by the delay in the decision of Goldman Sachs to launch a Bitcoin trading desk.
It is far-fetching to claim that the decision of a major investment bank to pivot from offering Bitcoin trading services — which may not appeal to its consumer base of institutions and large-scale corporations — to cryptocurrency custodian services led the price of Bitcoin to plunge within an hour.
Rather, it is more likely that the continuous build up of sell pressure on Bitcoin and other major cryptocurrencies since December of 2017 created instability and volatility in the market, causing the valuation of the market to drop.
Because the volume of Bitcoin remains relatively low in comparison to traditional assets and stores of value like gold, it is easier to trigger a domino effect across leading cryptocurrency exchanges.
Bitcoin is not considered a sufficiently liquid market, especially considering the fact that its exchange market is open to any individual investor and retail trader in the global market. While cryptocurrency market data providers estimate the daily volume of Bitcoin to be around $5 billion, studies have shown that most major cryptocurrency exchanges inflate their volumes through wash trading.