Anybody who follows Forex will be used to the fluctuations of currency pairs at the whim of investor sentiment or economic fundamentals. Such changes are usually very small and the approximate value of major currency pairs stays stable on a time scale of months. Dramatic overnight fluctuations are highly unusual, but do happen – remember the Swiss Franc adjustment of January 2015?
A central bank has levers that it can use to keep its currency broadly where they want it. Sometimes central banks will work together when a currency experiences significant shocks – the clearest recent example being support for the Japanese Yen following the tsunami of 2011. Investors have trust in currencies because they re fiat currencies backed by the state, not so for crypto currencies. These mechanisms do not exist in the deregulated word of cryptocurrencies.
Over the weekend, the value of the Bitcoin took a 10% hit, wiping $7.9 billion of the market cap of the virtual currency. Roughly 17 million bitcoins are in circulation. The reason for the spectacular fall was a high-tech bank robbery in which criminals managed to hack into Coinrail, a South Korean cryptocurrency exchange and the electronic thieves got away with an estimated $37 million. The steep decline in the value of bitcoin from $7211 to $6764 was in reaction to the theft, but more to the implicit vulnerability of a digital wallet. The virtual currency has continued to weaken over the past couple of days and is currently trading at $6537. At the height of its popularity (16/12/17) a bitcoin was valued at $19343, giving the currency a market cap of $0.33 trillion. Currently, the market cap of the currency is $0.11 trillion, two thirds of its value having been lost since the New Year.
When the bitcoin was launched, its unit worth was $0.6, but it would seem to have behaved as a classic stock market bubble, inflating to crazy heights before falling back to earth. This year, the bitcoin chart shows three clear peaks (and a total of five shoulders) each with a maximum value below the preceding one as investors take advantage of rallies in the currency’s value, however, the overall trend in value is plainly strongly lower – the only question is how far it will fall before gaining stability, or is a virtual currency a busted flush?