Bitcoin's 50% plunge and Ripple effect in cryptocurrencies rout

Bitcoin, Ethereum and other cryptocurrencies have plunged to four-week lows due to a loss of confidence sparked by regulatory proposals in South Korea and the unknown result of the expiry of initial futures contracts.

Traders in digital currencies were also eyeing the expiry of the first bitcoin futures contract on the CBOE after launch on 10 December. The first CME futures contract expires on 26 January.

Bitcoin dropped below $10,000 on Wednesday, taking the losses to around 50% since the cryptocurrency was testing $20,000, with some analysts expecting another potential halving in the price before long.

This has led to a massive sell-off across the digital currency market. Rivals currencies such as Ethereum and Ripple lost around a quarter and a third respectively, with all but two the largest 100 cryptocurrencies dropping at least 20% in the last day and half.

Analysts at Citi said a possible fall in Bitcoin to the $5,605-$5,673 area "looks very likely to be very speedy".

With bitcoin coming under substantial selling pressure once again on Wednesday, market analyst Craig Erlam at Oanda said: "While $10,000 even two months ago would have been seen as a huge success for Bitcoin enthusiasts, the euphoria towards the back end of 2017 saw prices sky rocketing on a daily basis driving many to claim it was in dangerous bubble territory.

"While that in itself doesn’t mean bitcoin will crash and burn, the warnings have proven to be legitimate in recent weeks. The question now is how long it will take bitcoin – as well as other cryptocurrencies that have had an equally awful month, some worse – to find its feet again."

REGULATORY RISK

The plunge occurred after the South Korean government said it was considering banning the trading of cryptocurrencies. The country’s finance minister Kim Dong-yeon said on a local radio station that banning trading of digital currencies was a “live option”.

The minister confirmed that although banning trading altogether could happen it still had to be thoroughly reviewed by the government ministries.

On the other hand he said that even if it isn’t banned there will be regulations put in place, like using real-name accounts and levying taxes on trading. He argued that because there is an irrational speculation around cryptocurrencies there should be a rational regulation.

These regulations aren’t being considered only in South Korea, the EU agreed in December on harsher rules to prevent money laundering and terrorism financing on cryptocurrencies exchange platforms.

The Chinese government also shares these concerns and have banned ICO’s (Initial Coin Offerings). It’s also looking to drive out China’s bitcoin miners who are believed to account for the majority on the planet.

More recently, Russian leader Vladimir Putin has also commented that the country will seek to reguate the digital currency's market more tightly.

This yo-yoing of the price of cryptocurrencies has left bitcoin more than 40% lower of its record high in December 2017 when it reached $20,000. This has taken $130bn off its market value.

Analyst Neil Wilson at ETX Capital said the break below $10k marked an "important breach of key technical and psychological levels", with potential technical support at around $9,600 before the $9,000 that was an old support from late November.

"A move to the $9,400 region would mark another important technical level ticked off as it would be a 61.8% retracement of the move from the September low from $3k to the December all-time high."

Wilson said the this bout of selling appears to have been sparked by a tightening of the regulatory noose on the wider cryptocurrency market.