Why is Bitcoin Falling?

Around July 14, bitcoin started a remarkable rally that saw it hit a high of $8424 by July 15. From just about $6,200, Bitcoin added almost $2000 in less than two weeks. Hopes were high that the market was finally coming out of a prolonged slump. The bullish trend did not however last. The leading cryptocurrency is now trading at $7407 according to data from CoinMarketCap having erased $1000 in gains in the last one week.

While volatility is now synonymous with cryptocurrencies, the recent spike was exceptional in some ways. The last significant rally was in May when the coin nearly hit $10,000 before sliding back to around $6000.

First, it is important to understand that the recent rally was largely due to the excitement around the bitcoin ETF. The Securities and Exchange Commission ultimately declined to approve the application filed by the Winklevoss twins sending the markets on a spin.

Another application through CBOE is currently before the SEC and the decision is due to be made somewhere in August although this may well be pushed further. While the application is structured differently, the conditions that led to the rejection of Gemini’s application are very much present i.e. concerns by SEC over market manipulation and the issue of customer protection.

The uncertainty is certainly playing a role in the current decline. But other factors are at play too. Bitcoin and other blockchain products were built on the promise of shaking up the way business has been done traditionally.

Blockchain entering the mainstream

However, as more institutions like IBM build different products around the technology, the case for some blockchain projects may be declining in the eyes of some investors. Few projects have rolled out tangible products almost a year after raising huge sums of money. Some of these ICOs were obviously overbought. Others understandably require a lot of time to actualise but the waiting does not help the anxiety among investors.

In the meantime, mainstream companies are increasingly exploring the space and developing real use cases.

LedgerConnect which is being developed by IBM and CLS aims to give banks and other businesses access to distributed ledger technology solutions. The initiative already has major players such as Barclays and CitiGroup as members. LedgerConnect is intended to be used in such as areas as KYC processes and reconciliation of market data.

Altcoins have been particularly taking a beating and a good number are just a fraction of their values in January. Most of these did not gain as much as the leading cryptocurrency during its bull run but have fallen even harder in the last few days.

Apart from the bitcoin ETF issue, there are upcoming tax crackdowns on cryptocurrencies which has spread jitters in the community.

South Korea and Japan are two important locations to watch when analysing the cryptocurrency market. South Korea for example is considering passing legislation to end tax benefits for exchanges.

The country which accounts for a good part of bitcoin transactions also wants to pass anti-money laundering legislation as well as laws touching on security. These can have a direct effect on transaction volumes and may be scaring away some investors.

For now, investor confidence is fragile and bitcoin could drop as low as $6000 having dropped below the key support of $7500.