Forex Trading Library

What’s Behind Bitcoin Crash?

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In the past few sessions, Bitcoin was on a skyrocket rising to a new record around $1133. However, things have changed quickly within the same time frame.

Bitcoin crashed more than 20% during the same record high session, declining all the way back below $850, which raises a lot of questions. However, before going into the details and the possible reasons behind the crash lets first look at the definition of Bitcoin.

Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.

Why is Bitcoin Different?

Bitcoin can be used to buy things electronically. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally.

However, bitcoin’s most important characteristic and the thing that makes it different to conventional money is that it is decentralised. No single institution controls the Bitcoin network. This puts some people at ease because it means that a large bank can’t control their money.

Who Created Bitcoin?

A software developer called Satoshi Nakamoto proposed bitcoin, which was an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.

Can I Physically Buy Bitcoin?

This currency isn’t physically printed in the shadows by a central bank, unaccountable to the population, and making its own rules. Banks can simply produce more money to cover the national debt, thus devaluing their currency.

Instead, bitcoin is created digitally, by a community of people that anyone can join. Bitcoins are ‘mined’, using computing power in a distributed network.

This network also processes transactions made with the virtual currency, effectively making bitcoin its own payment network.

Crash of 2014

Consensus has it that warnings and restrictions issued by authorities in China, on 5 December 2013, had caused (or triggered) the Bitcoin crash.

However, on closer inspection,  Bitcoin is apparent that the all-time high was made on 30 November 2013. The all-time price high is accompanied by a decisive instance of divergence in the MACD (and RSI) indicator – a technical sell-signal that market traders act on, without question, whenever it manifests in a price chart. The warning of risks associated with cryptocurrency investment, as well as exchange restrictions imposed by the PBoC, only came out of China five days later when the Bitcoin crash had already embarked on its third wave of decline.

There is no question that Bitcoin market participants acted (by selling their bitcoins) following the announcements out of China. It is evident from the chart, above, that the market top and ensuing decline preceded news out of China by five days. The Bitcoin crash was already underway.

Is It The Same Today?

From a technical point of view, it might be; Bitcoin crashed almost from the same levels that it crashed the first time back in 2013-2014 around $1130. The MACD and the RSI indicators also have the same story; both indicators crossed over to the downside indicating a selling opportunity.

However, China also might be one of the reasons for the recent crash, as it warned speculators regarding CNH devaluation in addition to the measures that the government took to curb capital outflows. For the time being, traders need to be very cautious as the $1130’s seems to be a very solid resistance. Moreover, even if Bitcoin managed to break above that resistance, there is no guarantee that this virtual currency will keep on rising, especially that China is looking to run after those who use this currency to withdrawal capitals from China.

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