The cryptocurrency market has lost $340 billion of value since the start of January, with a severe sell-off on Tuesday and Wednesday.

Analysts are variously blaming: concerns about regulation, light trading volumes in Asia, bitcoin futures, and an unsustainable price run-up.

Expect the volatility to continue this year, experts say.



LONDON — Bitcoin on Wednesday dropped below $10,000, almost 50% below its December peak, as the cryptocurrency market entered the second day of a sell-off.

Almost all major cryptocurrencies fell on Tuesday and the market slump has extended into Wednesday. The combined value of the more than 1,400 cryptocurrencies in circulation has fallen to about $460 billion on Wednesday from over $800 billion at the start of January, data from CoinMarketCap.com shows.

The causes of the sell-off are far from clear, with several theories making the rounds. Here's a roundup of what analysts and market participants are saying.

Worries about a regulatory crackdown

The most popular theory among market commentators is that fears about a regulatory crackdown in Asia are driving the sell-off.

"The sell-off comes amid concerns of fresh crackdowns on virtual currencies by the South Korean and Chinese government and as governments across the globe are struggling at how best to regulate bitcoin," Fiona Cincotta, an analyst with City Index, said in an email on Wednesday.

Russian President Vladimir Putin smiles during a press conference. Reuters Fawad Razaqzada, a market analyst with Forex.com, also said in an email on Wednesday: "Cryptos have been held back in recent days amid increasing levels of scrutiny from regulators, most notably in South Korea, where the government is planning to clamp down on trading in virtual currencies.

"The justice ministry is apparently working on a bill to ban cryptocurrency trading through exchanges. If the bill is eventually passed by the National Assembly, it would be very bad news, given that South Korea is the world's third-largest market for cryptocurrencies. The uncertainty is weighing on investor sentiment."

Aside from South Korean regulatory pressure, Russia is also signalling that it could crack down on cryptocurrencies. Russian President Vladamir Putin said "legislative regulation will be definitely required in future" for cryptocurrencies.

FXPro said in its daily client email on Tuesday that "the market seems overwhelmed by rumours regarding a complete currency ban in South Korea and the prohibition of mining in China due to high electricity consumption."

"What's more, it was today reported that Chinese financial authorities plan to block domestic access to cryptocurrency trading platforms," it added.

Asian volumes tailing off

Investors are already getting a taste of what a market without South Korean activity could look like — and this may also be playing a role in the cryptocurrency "bloodbath."

Mati Greenspan, an analyst with the trading platform eToro, told Business Insider on Tuesday that volumes from Japan and South Korea had been tailing off in recent days. Traders in these markets are usually buyers, and a large-scale exit could have created an imbalance in the market, with more sellers than buyers driving down prices and sparking a panic.

"As we noted yesterday, there's been a trend from South Korea and Japan of lower volumes these last few weeks," Greenspan said in a note to clients on Wednesday. "That did indeed come up a bit yesterday but is still nowhere near what it was in November/December."

Greenspan provided these graphs from CryptoCompare.com showing how Korean won bitcoin volume had recently declined:

A similar chart shows the same trend with Japanese yen bitcoin buying:

Greenspan said the pickup in volumes on Tuesday showed that "the two countries, especially Japan, are indeed starting to nibble at the lower prices."

"Indeed, the premiums have also come down a bit, and price in the top two crypto trading countries are now more normal compared to the rest of the world," he added.

Elsewhere, some market commentators are blaming the slump on Chinese Lunar New Year, arguing that many who celebrate the Asian holiday are cashing out cryptocurrencies to pay for gifts and travel associated with this time of year.

The bitcoin futures theory

Perhaps the wildest theory about what's driving the cryptocurrency crash is that the maturing of the first bitcoin futures contracts is to blame.

Cboe and CME Group both introduced bitcoin futures contracts in mid-December, allowing institutional investors such as hedge funds to speculate on the future price of the digital currency.

The first bitcoin contracts, which are cash-settled, matured on Wednesday. The contract's settlement price is determined by a price auction on the Gemini exchange at 4 p.m. on Tuesday.

Some people are speculating that aggressive selling activity could have been used to drive down the price of bitcoin on the exchange and turn the futures contracts into winning bets.

"Back-of-the-envelope calculations ... suggest that as little as a million dollars could be used to shore up futures positions and influence the auction market," said an EthNews report by Matthew De Silva on the theory.

A trader in the S&P futures pit at the CME Group in Chicago. REUTERS/John Gress CNBC, which also floated the idea, reported that Cboe's January 17 maturing bitcoin futures were priced at $10,000 on Tuesday afternoon, meaning that holders, in theory, had an incentive to push the price down by selling bitcoins they may have held as a hedge.

Meanwhile, a popular Reddit thread says a sudden drop in the bitcoin price could have spooked the market.

"It's always fun to spin these types of stories, but personally, I don't buy into it," Greenspan told Business Insider.

"No. 1, the entire market crashed, not just bitcoin," he said. "All the altcoins plummeted as well, and Wall Street only has access to the bitcoin futures, which is fairly disconnected from bitcoin itself and certainly from the likes of Litecoin and Dash.

"Second point, the volumes that have been traded on these futures contracts are not sufficient to move the markets."

Greenspan said the total trade of Cboe's January 17 bitcoin contracts was about $1 billion in the month since they launched.

"Daily market volume on bitcoin is today $14.5 billion," he said. "One billion over the course of a month, I don't think, is going to tickle anything."

Thomas Bertani, the CEO of the cryptocurrency-wallet company Eidoo, which has a cryptocurrency, agreed with Greenspan.

"It might have played a role," he said, "but those price movements are all but new."

A correction that was a long time coming

Bertani thinks the biggest factor driving the crash is the market overheating. Bitcoin rose by over 200% from October to December as huge numbers of new investors poured cash into it.

Other cryptocurrencies rose alongside bitcoin, and many market watchers argued that this created unsustainable bubble-like market conditions. The recent crash is just some of the air coming out of the bubble, Bertani says.

Pawel Kuskowski, the CEO of Coinfirm. Coinfirm "The last year has seen once again a massive growth and hype cycle (like it did already several times before) which needs to go back to normal after the current hype has reached its peak," he said. "This is most likely what is going on now."

Bertani added: "The hypothesis of South Korea banning cryptocurrencies, more than a driving factor, is really just an excuse for the market to rest down for a little bit before continuing with its continuous growth."

Pawel Kuskowski, the CEO and founder of Coinfirm, which provides cryptocurrency compliance services, told Business Insider on Wednesday that it was "a correction, a long-expected correction."

"It was just for too long going up and up and up," he said. "Ether, in two months, went up from $300 to $1,300. That's absurd. Just crazy."

He added: "I think there are some positions that are being closed at the moment, but I don't think it's going to be a big negative impact. The correction was quite needed because it was just absurd what was happening."

Expect more volatility

While Kuskowski doesn't expect any long-term negative effect on the sector from the currency sell-off, he thinks we are likely to see more of this type of volatility for the foreseeable future.

"I think it's going to stabilise probably not this year, but probably within three or four years," he told Business Insider. "You're going to have more checks and balances, but in principle, it's going to be a crazy world for another one year, two years, that's for sure. You're going to see more and more volatility, but then it's stabilisation."

Christopher Keshian, a managing partner and founder of Apex Token Fund, agreed.

"The volatility of bitcoin — and other cryptocurrencies — is an expected, and important, part of the journey to becoming a mature asset class," he said in an email. "We expect the volatility to continue throughout 2018 but fundamentally believe that bitcoin is still in a bull market."