Possible reasons for the severe volatility in Bitcoin’s price

Although some of us called it at the time, in only a month’s retrospect it is crystal clear that investments in cryptocurrency had formed a huge bubble. Economist Nouriel Roubini in fact declared it to be the “Mother of all Bubbles”, and the largest recorded bubble in history.

Contrary to popular perception, economic bubbles do not collapse completely in a single day as with a balloon popping but usually take some months to fully deflate. For instance, the 1929 stock market bubble began to deflate as early as September of that year, had massive selloffs in October, but didn’t fully bottom until February 1930.

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Bitcoin Has No Fundamental Price to Fall Back Upon

Stock market crashes never bottom at zero, for the reason that at some point market fundamentals take back over and folks can see a return for their investments. Take Microsoft stock, which got hammered in the dot-com bust of 2000 from a high of 39.264 in December of 1999 to a low of 14.589 in December of 2000. Why didn’t Microsoft stock go to zero as did so many other tech stocks around that time, or as Lehman Brothers did in 2008? The reason is that Microsoft’s stock had a fundamental price to fall back on.

The problem with buying a Bitcoin is that it doesn’t generate a return, but is simply an internet token that is used as an alternative to transferring money between its users (and for which they have to pay fees with each transaction). In other words, Bitcoin has no fundamentals, and will never have fundamentals. The only thing that Bitcoin investors have is a hope, or maybe closer to a prayer, that the value of Bitcoin will increase in the future based on demand. Even the latter seems bizarre, since there are over 1,300 cryptocurrencies that do about the same thing that Bitcoin does, and it doesn’t take much more than a sharp mathematician with an algorithm to create a new cryptocurrency, i.e., cryptocurrencies are a widget of potentially cheap and infinite supply, which should make any investor betting on future appreciation, well, cringe.

Those cryptocurrencies, including Bitcoin, lack a fundamental price has another ramification, which is that it seems impossible to price individual units of cryptocurrency at much above zero. Some economists, for example, say that at best Bitcoin should have a nominal price of $20 per unit.

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There Is Rampant Market Manipulation in Cryptocurrency

In recent days, there has been no shortage of articles discussing price manipulation in Bitcoin, with clear evidence of significant price manipulation occurring in 2013, and in the 2017 run-up.

Price manipulation is simply the flip-side of the so-called benefit of cryptocurrencies that they are not subject to government regulation. Without regulation, bad actors can manipulate the price of cryptocurrencies and then cash out rich long before the rest of the investors catch on.

Even as the Bubble deflates, there seems to be quite a bit of bull trapping going on, by key low-volume trades being made which seem to indicate a price-reversal upwards, and then selling to these fooled investors at the higher price. This sort of market manipulation significantly contributes to volatility.

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