The cryptocurrency markets are plunging this morning with the like of Bitcoin, Ethereum and Ripple all plunging in value overnight. As at 10.41am AEST the Bitcoin price sits at US$5,793 (A$8,006) according to Investing.com, with its price down close to 11% in just 24 hours it's now sitting at a 52-week low and has been in a bear market throughout nearly the whole of 2018.
So what's going on?
The bitcoin price can move in unpredictable ways as it's often described by business commentators as a commodity or store of value and as such the biggest driver of the price is sentiment, which directly impacts supply and demand.
Basic high school economics teaches that as demand for a commodity rises so will its price if its supply cannot be increased. The opposite applies in that as demand falls so will a price unless the supply reduces.
For example, today a 25 kilogram bag of grain is worth a lot less than a standard Cartier watch, however if the world were hit by a catastrophic famine in 2021 the bag of grain would be worth a lot more than the Cartier watch due to the relationship between supply, demand and price.
The same is true of the Bitcoin price as demand is largely driven by the sentiment of potential investors that are themselves swayed by the underlying price direction.
Technical cryptocurrency traders for example will use 20, 50 or 200-day moving averages to determine whether they should buy or sell digital currencies and if these break to the downside it can add to the selling pressure.
The fact that the Bitcoin price has now hit a new 52-week low will be considered a bearish signal by many traders and analysts who use charts to guide them for price direction given the digital currency has no real underlying value as an asset.
Exactly what is causing the steep sell off is unknown, but some have also pointed to uncertainty over the 'fork' in Bitcoin, which has seen it split out into Bitcoin cash, with Bitcoin cash also due to split itself again this week.
Bitcoin doesn't pay a big dividend like ASX blue-chips Suncorp Group Ltd (ASX: SUN) or Insurance Australia Group Ltd (ASX: IAG) either.
But these two blue-chips are unlikely to grow much in the years ahead either…
