Bitcoin I Being Challenged By Recent Market Events

Bitcoin has lost over a fifth of its value in the last few days. After trading at a near all time high of $1300, Bitcoin value fell to $970 over the weekend. The crypto-currency seems to be going through a tough time as a series of market events are colliding causing negative effects on its valuation and trading volume.

From developments by regulatory authorities in the US and China to a never ending technical argument in the developer community, Bitcoin is experiencing severe challenges on different fronts. The drop on the price of Bitcoin seems to be more than a mere correction and the platform has certainly shown a lot of fragility and vulnerability to those type of market events. The change of value and volatility confirms that there is still a lot of work to be done stabilizing the crypto-currency as a tradable asset.

The SEC Decision

Last week, the Securities and Exchange Commission passed a harsh judgment on Bitcoin by rejecting the proposal to create an exchange traded fund(ETF) for the digital currency( read my previous article about this topic). The SEC cited potential fraud and market manipulation as some of its arguments against the ETF proposal.

An approval for a Bitcoin-based ETF by the SEC would have been a tremendous validation for Bitcoin and it would have allowed institutional investors to trade the crypto-currency. Additionally, as I reflected on a previous article, Bitcoin would have benefited from more sophisticated trading strategies and the correlation with other tradable assets. Just a few hours after the SEC decision, the price of Bitcoin dropped about 15% to about $1050.

China Regulations

During the weekend, China’s central bank circulated new guideline to regulate Bitcoin exchanges. The guidelines dictate that Chinese Bitcoin exchanges could be subjected to anti-money laundering and banking laws. Additionally, the document indicates that Chinese Bitcoin exchanges could be required to disclose and verify the identities of its clients. The guidelines are a continuation of the Chinese government crackdown on Bitcoin exchanges operating in that country which has been causing a lot of concern among investors and is having a material impact on the market.

A couple of months ago, Yuan-based Bitcoin trades accounted for 97% of the global volume. However, after authorities got involved, the volume has dropped to about 17% while Dollar-based trades rose to about 50% from 1.4% and Yen-based trades got to 15% from 1%. One thing is for certain, we haven’t seen the latest of the influence of the Chinese governments on the price of Bitcoin.

The Block Size Debate

A two year old disagreement between Bitcoin developers continues to regularly impact (both positively and negatively) the price of the digital currency. The argument is related to the size of an atomic batch of transaction that gets processes by the Bitcoin network (also known as a block). Currently, Bitcoin restricts the size of a block to 1MB and which is causing some serious challenges in terms of the scalability of the network. Part of the Bitcoin community has come up with a clever solution known as bitcoin Unlimited that increases the size of a block. However, there is another important group in the community that continues defending the current model (known as Bitcoin Core).

Why is this is a big deal for the price of Bitcoin? Well, the main threat to the price of Bitocin is that the arguments between the two groups have come close to cause a “hard-fork” of the Bitcoin code effectively creating two versions of the network which will immensely complicate its tradability.

CEO of IntoTheBlock, Chief Scientist at Invector Labs, I write The Sequence Newsletter, Guest lecturer at Columbia University, Angel Investor, Author, Speaker.

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