Bitcoin Crash – A Case of Self-Fulfilling Prophecy?

When Litecoin creator – Charles Lee – tapped out a tweet in the wee hours of Wednesday morning, he perhaps did not anticipate that the advice he casually dropped to Bitcoin (and other cryptocurrency) investors at 3:27am, might be followed by someone so soon and with such chaotic effect.

Bitcoin

The former Google software engineer’s tweet seemed innocent enough: it encouraged hodlers (an inside term for investors that have chosen to buy cryptocurrency in the earlier days and demonstrated their faith in crypto by holding onto it for a long period of time) to reward themselves for their tenacity by cashing in some of their accumulated profits. When the trading day began that morning, Bitcoin was doing well enough and even reached an all time high of $11,441 shortly after 9am EST. But just over an hour later it crashed by more than $1300, all the way to the $9000 level, within a time of frame of less than four minutes. For reference, the price of Bitcoin did not even reach above the $1,300 level for the first time, until May of this year. The lightning fast dip in price roiled the crypto markets and badly panicked investors.

Even more interesting is the purported cause for Wednesday’s massive correction, which appears to be an anonymous ‘whale trader’ closing his/hers long positions. In simpler words: a hodler that has been sitting on a massive amount of Bitcoins until yesterday, decided to follow Mr. Lee’s advice and finally sell all or most of the coins for profit. Since the amount of Bitcoins that were so unexpectedly dumped onto the market in one go was enormous, it suddenly inflated the supply – creating an instant and massive plunge in the price. This initial drop was greeted by investor panic. Fearful of further drops, frantic investors scrambled to sell their coins and by doing so, pulling the price down even further.

Major crypto-exchanges found themselves overwhelmed with a veritable flood of sell orders. Users reported a range of problems including slow performance and not being able to log into their accounts. The sudden tsunami of frenzied selling activity crashed the platforms of Coinbase, which is considered the world’s most funded exchange, along with Gemini. Problems were also reported with GDAX and Bitstamp as users reported being locked out of accounts. Upon attempting to access them, traders were greeted with the the detested a ‘504 gateway time-out’ message. By Wednesday afternoon most of the affected exchanges notified clients that systems were experiencing ‘degraded performance’ and promised to remedy the problem ASAP.

While Bitcoin already began to show signs of recovery Thursday morning –  making their way back above the $10,000 level – the events of “Wild Wednesday” have clearly underscored the fact that the digital coin market is especially susceptible to investor panic. This is perhaps logical, considering the main driving force behind Bitcoin’s recent gravity-defying climb has been an intense media hype.

The intensity of Wednesday’s correction was compared to the one observed back in September of this year, when Chinese authorities cracked down on unlicensed crypto-exchanges and ICO’s. However it is precisely this example, that Bitcoin’s proponents are now referencing. They are pointing to the fact that at the time of the events in China, nay-sayers jumped at the opportunity to disparage Bitcoin, only to see it defy their soothsaying. Despite that initial drop in September, Bitcoin went on to set  far bigger records than anyone imagined. Basing themselves on these facts, Bitcoin enthusiasts are making the case that Wednesday’s drop is much like the one in September – nothing but a temporary and natural correction that will not impede Bitcoin’s eventual acceptance as a mainstream financial instrument – as well as an opportunity for clever investors to buy into Bitcoin at a discount rate.