2017 was the year when everyone and their mothers hopped on the crypto bandwagon, but it seems like at least half of those people have hopped off the wagon in the first half of 2018. According to CoinMarketCap.com, bitcoin is down a little over 50 percent this year, and the entire crypto asset market as a whole is down around 56 percent.
So what happened? By taking a look at basic human instinct, it becomes easy to see why the bitcoin price has fallen to where it is today.
The Bubble
There has been a lot of hype around “blockchain technology” over the past few years, but 2017 was when the hype hit a fever pitch. It seemed like new tokens were being created to solve all of the world’s problems, and many investors were ready to throw money at projects that had nothing more than a whitepaper to show for themselves.
While there are some crypto assets and blockchains that have proved their usefulness to the world (namely bitcoin, as Blockchain Capital’s Spencer Bogart recently pointed out), the vast majority of projects that came about in 2017 were little more than fluff. It was the rising prices of coins like bitcoin and Ether that pushed these assets into the mainstream news cycles and grabbed the attention of those who just wanted to get rich quick.
Everyone was out to make a quick buck on this new technology, and it eventually became clear that the actual use cases behind these projects were no longer relevant. As crypto asset prices continued to rise, more people who thought they could make a few quick bucks jumped on the bandwagon.
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Why Did I Buy Bitcoin?
Once crypto asset prices reached the ridiculous levels seen late last year — when bitcoin nearly hit $20,000 — it was time for the long-term hodlers to rebalance their portfolios. After all, if you’re up twentyfold over the course of a year, it’s probably a good idea to take some money off the table.
“A simple explanation for why nasty crashes always follow meteoric rises:
1. High Sharpe investments cause people to fomo without doing any homework.
2. Early adopters cash out to diversify, creating sell pressure.
3. Fomo-buyers lacking long-term view become panic-sellers.”
— Qiao Wang (@QWQiao) June 24, 2018
As early investors began to cash out of the crypto market, the people who got caught up in the price hysteria of the second half of 2017 began to question why they bought bitcoin or some of the other coins in the first place. It was at this time that they realized they had no idea whether the price could fall by 70 or 80 percent overnight, so they began to panic sell. This panic selling led to more panic selling down to the $6500 per bitcoin levels we see today.
So what can we learn from all of this? The best lesson to take away from the past six months is that you should never buy something just because you see that the price is going up. If you don’t know why you bought something in the first place, then you’ll likely sell it as soon as the price goes down a bit, and you’ll end up losing some money in the process.
Secondly, it’s important to take a long-term vision when it comes to speculating on the prices of crypto assets. Learn about the fundamental value proposition of a coin and hold it for five to ten years if you think there is some long-term upside for it. If you’re only thinking short-term, your emotions may get the best of you as you try to time the market, and you’ll end up like those who bought bitcoin at $15,000 and decided to sell at $9,000.
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