The first month and a half of 2018 have been less than kind to the cryptocurrency markets. Prices, which were on an unsustainable upward trajectory, reversed course as supply finally overwhelmed demand. The introduction of futures in December could have been the catalyst for the decline, but the markets were severely overbought. This led to a significant correction in the price of Bitcoin, Ethereum and Ripple.
Futures Contracts are Introduced in December
In December of 2017, both the Chicago Board of Options Exchange and the Chicago Mercantile Exchange introduced futures contracts on bitcoin. Futures track the price of a bitcoin index but do not provide investors with an actual bitcoin that they can spend on goods and services. What futures contracts did, was provide a vehicle for traders to short bitcoin prices, which were nearly impossible before the introduction of these derivative products. Prior to the introduction of futures contracts, investors could only purchase bitcoin or sell the bitcoin they owned. There was no mechanism in place to short the price of BTC. Since there was a limited supply of bitcoin and rising demand, there was only one direction the price could move prior to the introduction of futures contracts.
By mid-December of 2017, bitcoin prices were severely overbought. In the beginning of January, prices appeared to be on the mend and ready to rebound. Unfortunately, prices remained overbought and risk off ensued putting downward pressure on prices. During January, prices fell from above 17K down to 10K, as many investors who purchased above these levels, quickly looked for the exit. The decline took prices from overbought territory in mid-January to oversold territory in early February. Since then, bitcoin prices have been looking for a bottom.
Ethereum lost more than 28% of its value in January and the selloff in the cryptocurrency continued into February. Prices stabilized below the 600 level and have rebounded 25% since hitting their recent lows. Prices never became oversold according to the relative strength index. In fact, the lowest reading that appeared on the RSI was 34, which is above the oversold trigger level of 30. Ethereum has the second largest market cap of all the cryptocurrencies but was briefly overtaken by Ripple during the early part of 2018. Ethereum is used on an application platform as a currency to develop an application which helps consumers learn cryptocurrencies.
Ripple prices took a wild ride in late December and early January as several multi-national companies discussed the future use of the miner-free cryptocurrency. Prices surged 1,600% from late December to early January but then experienced a massive liquidation. Prices then tumbled from above $3 to approximately $0.70, which reflects the speculative nature of these cryptocurrencies.
Where Do We Go from Here?
Cryptocurrencies are likely here to stay. The question is-which ones survive the initial stages of consumer acceptance? Bitcoin has the issue of scalability while Ethereum targets consumers of a specific platform. Unlike bitcoin, ripple does not have the same type of verification process available making security a concern. The relative value of a bitcoin will continue to fluctuate but 1-bitcoin is still worth 1-bitcoin which someday may be all that counts.