What's Plaguing Crypto Markets: Experts Weigh In

Generally speaking, it has been a rough few weeks for digital currencies. With the exception of the past few days, bitcoin (BTC) and other virtual tokens have tended to fall consistently, shedding billions in total market cap across the industry over seemingly regular intervals. BTC dipped close to $6,000 but has not yet passed that barrier as of this writing. While it has since recovered somewhat, it is nowhere near its record highs of close to $20,000 from just several months back. What could be causing the dramatic slump in the cryptocurrency market? A report by Coin Telegraph has drawn together expert opinions, which point to several possible factors that may have contributed.

Security

Naeem Aslam, chief market analyst at ThinkMarkets, suggests that security and reglulation concerns might be impacting digital currency prices. On June 11, a relatively minor digital currency exchange in South Korea was hacked, and many news outlets rushed to assume that this was linked with a sudden drop in digital currency prices. Aslam believes that this may be part of a pattern. He suggests that "exchanges are not utilizing the top-notch technology to protect consumers, and hackers are taking full advantage of this issue. The question is, is there any limit to these hacks? ... we are seeing the same pattern emerging. This is the result of loose regulatory control, and regulators must step in to protect the consumers."

For Aslam, the hacks are adding an element of risk to the cryptocurrency space that may be turning off traditional investors. When risk increases, Aslam suggests that smart investors "move their funds from riskier assets to those where they can seek safety." So long as digital currencies are not seen as safe, this may be a problem.

Manipulation

Emin Gün Sirer of Cornell University believes that manipulation may have been dampening the market. He suggests that "the cryptocurrency markets are in their early stages. We know this from the fact that the coins still have not decoupled—they all move in unison, regardless of the merits of one project over another. This indicates that systemic risks to the area dominate all other concerns." Chief among these risks is manipulation, particularly in light of recent research suggesting that BTC price records last December may have been the result of this illegal practice.

 Sirer continues by suggesting that "the current downturn is motivated by one such perceived risk: the law enforcement action on exchanges and their effort to put a stop to price manipulation." While such action is necessary and ultimately beneficial, Sirer suspects that the short-term impact on the market may be negative.

SEC Action

For Tom Lee, co-founder and head of research at Fundstrat Global Advisors and long-time bitcoin bull, one of the most impactful elements this year has been the government. He suggests that "a lot of government actions that have been taken this year ... have scared crypto investors," adding that "probably the most notable is the actions taken by the U.S. regulators, like the SEC taking action against ICOs."

Lee also believes that the expiration of bitcoin futures contracts may have been partially responsible for the recent decline in BTC's price. He says that "the market has a supply/demand problem, because mining rewards, coupled with tax selling, and other factors have caused more supply versus demand for crypto. The futures markets have been subject to some potential manipulation ... [the futures markets at the moment are] enough to affect bitcoin price."

Whales

Miguel Palencia, Qtum's  chief information officer, suspects that the current low may be the result of so-called whales, those holding large amounts of a cryptocurrency. He believes that "bitcoin, like other assets and technologies, goes through cycles that affect its use, which is often correlated with the asset price ... eventually, when the blockchain ecosystem becomes fully decentralized and not controlled by big stakeholders and 'whales,' it will be bringing back trust into the markets and we can see the markets climbing again." While Palencia believes whales are likely to have played a part in supposed market manipulation, they are also essential in keeping the cryptocurrency market afloat as well.

A common theme among these experts, regardless of the impact of the various concerns they raise, is that there is no need for investor panic. Indeed, each of them expressed some degree of optimism about the future stability of the cryptocurrency space. Of course, only time will tell if these predictions come to pass.

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin and ripple.