"It's clear by now that the entire crypto market is in a massive retracement," one analyst says.

People who have made money on bitcoin are now selling out, while newer buyers are taking losses. The two factions are essentially at war.

Volatility is a normal state of affairs for bitcoin, which is not backed by an underlying asset.



Every day, Mati Greenspan, a senior market analyst at eToro, sends a mass email summarising what he thinks is going on in the cryptocurrency markets right now.

On Friday morning, the first line of that email said it all: "It's clear by now that the entire crypto market is in a massive retracement."

Bitcoin is seeing a "massive pullback," he added.

Bitcoin fell $3,000 overnight, moving down 17%, to under $13,000. It was at $20,000 earlier this week. That's a loss of 35% in just a few days. A lot of people — new entrants to the market — have lost a lot of money.

So people are asking: Are we looking at a "Christmas Crypto Crash," the bursting of the bitcoin bubble that bears have been expecting for weeks now?

2 factions of bitcoin investors are now at war

Mati Greenspan. Mati Greenspan / LinkedIn What you are looking at is a war between two factions inside the crypto-speculator community, who have opposite vested interests:

Faction No. 1 is "old holders." A massive percentage of all bitcoin is owned by a small number of investors who bought in years ago. Many are now millionaires or even billionaires — or just very, very rich. They have been holding bitcoin since 2011 or bought in before the beginning of this year. They have seen bitcoin go from close to zero to $100, $1,000, and all the way up to $20,000. And now they have to sell at least some of their holdings into fiat currency if they want to realise those gains before the market destabilises and makes them poor again. They don't care if the price falls a bit; they have made their money.

A massive percentage of all bitcoin is owned by a small number of investors who bought in years ago. Many are now millionaires or even billionaires — or just very, very rich. They have been holding bitcoin since 2011 or bought in before the beginning of this year. They have seen bitcoin go from close to zero to $100, $1,000, and all the way up to $20,000. And now they have to sell at least some of their holdings into fiat currency if they want to realise those gains before the market destabilises and makes them poor again. They don't care if the price falls a bit; they have made their money. Faction No. 2 is "newcoiners." This is everyone who bought in this year. Many are undereducated on the risks of alt-coins and have been attracted by media coverage and the idea that they could get very rich very quickly if they ride this roller coaster. They need the price to rise — and that means every seller is their enemy.

The newcoiners' problem is that the old holders own vastly more bitcoin than them and thus can control the market — even though they vastly outnumber the old holders. When the oldies sell, the price goes down. (The Winklevoss twins, for instance, own 1% of all bitcoin, worth more than $1 billion, though there is no indication they are selling.)

Right now, the newcoiners are being dragged along on a ride they don't want.

A thread satirising this phenomenon on the bitcoin subreddit shows a clip from an old episode of "Mr. Bean" in which Rowan Atkinson's nerdy character sits unmoved on a roller coaster while the other passengers behind him scream.

Rowan Atkinson in "Mr. Bean." Mr Bean / ITV

"It started with a bit of profit taking, but it seems that the FUD" — fear, uncertainty, and doubt — "is now gripping the market," Greenspan wrote on Friday morning. "Comments from enthusiasts like Charlie Lee probably didn't help either."

Lee, the creator of litecoin, warned last week that his cryptocurrency is so unstable that investors ought to be prepared to lose 90% of their investment in it.

"Sorry to spoil the party, but I need to reign in the excitement a bit," Lee wrote on Twitter. "Buying LTC is extremely risky. I expect us to have a multi-year bear market like the one we just had where LTC dropped 90% in value ($48 to $4). So if you can't handle LTC dropping to $20, don't buy!"

Greenspan said he could easily see bitcoin sink to $10,000 — which would be a loss of half its highest value.

"In fact, $10,000 was exactly the level that bitcoin was trading at the beginning of this month, and so it would not be surprising to see it there again," he wrote.

Greenspan said he thought this was temporary.

"Those who have been in this market for a while are not nervous though," he said. "We've seen this type of action many times before. In fact, the traders out there have been expecting it."

He added: "You don't get quadruple-digit gains without a few double-digit pullbacks. For the true believers, this is the time to consider buying the dip."

There is reason to believe that buyers might outnumber sellers in the short-run.

Goldman Sachs is reportedly building a cryptocurrency trading desk and wants to clear bitcoin futures, the type of derivatives that Cboe and CME are already providing. Those moves are likely to bring new buyers into the market — and more demand will bid up the price.

What kind of asset loses half its value in just a few days?

Eventually, drops like Friday's will force those investors to question what bitcoin actually is. What kind of asset — or currency — rises by 100% and then declines by 50% in just a few days?

Bitcoin's price is so volatile precisely because it is neither a currency nor an asset.

A currency comes with an interest rate and, crucially, can be used to pay taxes. Those two underlying factors keep a currency's value relatively steady.

An asset entitles the buyer to some underlying thing that may have a value of its own aside from its price — for instance, a house, a stock, or a bond can provide rental income (or simply shelter), dividends, or interest.

Bitcoin has none of these. It represents nothing. It entitles its holders only to its current price, which is set by merely supply and demand.

On that measure, volatility is bitcoin's best-case scenario. The worst case? That's the day when holders realise they don't own anything except other people's beliefs about the future. On that basis, bitcoin could go to zero — as Lee helpfully pointed out with litecoin.

Right now, the old money appears to be bailing from the market, forcing losses onto the newbies. Whether they believe enough to stay in is anyone's guess.