This morning, as of January 17th, Bitcoin has plummeted from over $14,000 to an average of just over $9,500. Over the last week the value of almost every cryptocurrency has fallen significantly, some by over 60%, and people are starting to panic. I will go through a few big reasons why I think this giant price correction is happening, and how this price correction will recover. This is just my opinion, I am no financial expert, so PLEASE do your due diligence when deciding when to buy Bitcoin or any other cryptocurrency.

What started this downtrend?

There were a couple events in Asia that triggered a large amount of FUD (Fear, Uncertainty, Doubt) in the crypto community. There was confusion on what the Korean government was going to do in terms of regulating cryptocurrency. Some people such as their Finance Minister said that an outright ban on crypto trading was possible. As of this moment, the Korean government has put tighter regulations on the trading of cryptocurrency, which in my opinion is a good thing. Even though some do not want any government to be involved in this space, it is inevitable, and if crypto is treated as a legitimate investment, it will make many people see the space as a safer option. People are protesting the potential ban on cryptocurrency, with many people accusing their financial minister of outright manipulating the market by causing FUD. There is currently an online petition with over 200,000 signatures urging the government not to ban cryptocurrency or to regulate the market. The Korean crypto market is growing exponentially and is closed off from the rest of the world, as someone would need Korean citizenship and a Korean bank account in order to use any exchange. This has made the market in Korea have a huge amount of arbitrage compared to the rest of the world. In some cases, cryptos are trading 50% higher in Korea than the rest of the world. The arbitrage is so much higher, that it was inflating prices for everyone else on Coinmarketcap, The website made the controversial decision to stop factoring in Korean prices into the average price earlier this week, which caused every price on the website to fall. This could have been handled much better by the website, and a proper warning could have been issued ahead of time. Both of these issues from Korea have caused the market to freak out, and legislation from China did not calm peoples nerves. China has threatened to ban the trading and creation of cryptocurrency, and since most mining activity happens in China, many people have to find new places around the globe to move their operations. Canada has been praised as a great location, as the government is very Bitcoin-friendly, and electricity is cheap. Iceland is also a great place, as there is cheap geothermal power, and the cool temperatures save the miners on air conditioning needed to stop their machines from overheating. Overall, Asia is the region of the world that has caused almost every FUD related correction, and I think market manipulation is a potential factor, as the government usually makes statements that cause the market to panic.

Overvaluation in general.

A couple weeks ago, I wrote an article on how the cryptocurrency space in general was overvalued. The technology behind Bitcoin has not changed, while adoption has grown exponentially. The introduction of futures as well as Bitcoin being talked about on the news has exposed the space to millions of potential buyers. This caused billions to flow into the space in November/December, and the price launched up too fast. Altcoins such as Verge and Ripple, who have seen catastrophic losses in the past week, have grown exponentially in the past month, as news outlets started to discuss them. This has led to insane valuations for tokens with no tangible project behind them. Coins that are in alpha stages have billion dollar valuations, and it was only a matter of time before many of these came crashing down.

How FUD made the problem even worse.

FUD is a powerful force in any financial market. It is what causes people to make irrational and emotional investment decisions. For example, someone who bought Bitcoin might sell at a loss because they think the price will only go down further. A diligent investor will buy the dip, as when the market inevitably bounces back up, they will make a profit. A noob might buy at the top because new outlets kept saying Bitcoin was only going to go up from that point. A disciplined investor would sell at the top if he saw that people were throwing in money just to make money. They call it the “Last fool rule” which implies that as long as there is another fool that is willing to buy the top, the price will keep rising. As soon as the fools run out, the price will fall.

Overall, this is one of the largest corrections I have seen on the crpyto space. However, I knew many different cryptos were very overvalued, and I saw this drop coming. Remember, do not panic. The market will recover, as the selling pressure will eventually lessen. Buy the dips and sell the top.

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