Future Tense

Why Has Bitcoin’s Price Fallen So Sharply This Week?

Bitcoin's value fell by more than 25 percent this week.
Bitcoin’s value fell by more than 25 percent this week. Dan Kitwood/Getty Images

The year-long cryptocurrency slump is devolving into a further downward spiral this week. The price of Bitcoin fell 13 percent on Tuesday and more than 25 percent over the week. A single Bitcoin is currently worth about $4,400, marking the first time the value has dropped below $6,000 in months. Other lesser-known cryptocurrencies are seeing similar drops. At $32, Litecoin is at around its lowest value for 2018. The same is true for Ethereum, now at around $130.

There a number of theories floating around for the drop. One attributes the recent problems to scrutiny facing Tether, a cryptocurrency that is supposedly backed by U.S. dollars, and the exchange called Bitfinex that created it. Analysts have long suspected that investors on Bitfinex had been artificially inflating the price of Bitcoin during its wild upswings last year by performing wash trades, which in this case would essentially involve buying and selling a cryptocurrency in order to create the illusion of activity. Bloomberg reported on Tuesday that the Justice Department is investigating Bitfinex and Tether Ltd. to determine whether people were using the Tether token to buy Bitcoin in a wash trading scheme. With the looming threat of an indictment, it could be that Bitcoin is falling closer to its actual value because it is no longer being artificially propped up. (Tether Ltd. has denied the allegations.)

Analysts have attributed much of the year-long decline to the general threat of regulation and law enforcement actions. There have been other recent signs of tightening oversight beyond the Tether investigation. On Friday, the Securities and Exchange Commission fined the companies Airfox and Paragon for failing to register their initial coin offerings (ICO)—a process through which crypto tokens are distributed to investors—as securities. The SEC also mandated that the two companies allow investors to retrieve their funds. This case may set a precedent for other cryptocurrency companies, many of which could go bankrupt if forced to pay out similar penalties and reimbursements. However, it’s worth noting that the ICO market is notoriously shady—the cryptocurrency advisory firm Satis Group estimates that up to 85 percent of ICOs are scams. A study out of Boston College additionally found that 56 percent of cryptocurrency companies fold within four months of their ICOs.

Another theory is that divisions within the Bitcoin community are triggering a massive sell-off of assets. There has been a debate raging in cryptocurrency circles the past few years over the fact that Bitcoin can only process a handful of transactions per second, which causes bottlenecks. In 2017, a faction of the community created an alternate version of Bitcoin called Bitcoin Cash, which can handle more transactions, through a “hard fork” process. Then, last week, Bitcoin Cash itself went through a hard fork. This balkanization of the Bitcoin community and fragmentation of the currency may be further discouraging investors.

At this time last year, cryptocurrencies were an international fixation due to their skyrocketing prices. Bitcoin reached $19,783.21, its highest-ever value, on Dec. 17.