Over the weekend the price of bitcoin fell by nearly $500 to a two-month low as the cryptocurrency market responded to news that Coinrail, the South Korean based exchange had been the victim of a hacking attempt.
In the following 24-hour bloodbath, bitcoin lost nearly 8% of its value, dragging down the price of other cryptocurrencies, including Ethereum and Ripple along with it.
The latest price slump dents the forecast of many crypto analysts, many of whom were actually expecting a market rally that would see bitcoin return to something near its December 2017 figures when it traded for $19,000.
The weekend crash also brought the year-to-date losses of bitcoin to 50% as the cryptocurrency market struggles to cope with frequent hacking attempts, tighter regulations and waning investor confidence.
In light of the ongoing, Digital Coin News has made a list of 5 reasons why bitcoin lost nearly half of its value in 2018.
- The Hack of Bitcoin Exchanges
The persistent hack of bitcoin exchanges has severally weakened investor confidence in the safety of digital currencies as an investment or financial security. Last week’s hack of Coinrail is only the latest in a string of high profile bitcoin heists in recent months
The South Korea based exchange trades in about 50 different cryptocurrencies, and the country is one of the most important markets for bitcoin trade. Crucially some of the biggest bitcoin hacks in recent years have happened in the country. Last July, hackers breached Bithumb, another Korean based exchange, stole thousands of bitcoins and compromised the data of almost 32,000 users.
That attack was followed by another in December in which hackers broke into Youbit, leading to the loss of around 4,000 Bitcoins or 17% of its total asset.
- Government Regulations
Perhaps no other single factor has contributed more to the fall in bitcoin prices than the news of impending government regulations. In May, the U.S. Justice Department has announced that it is exploring new ways of enforcing regulation in digital currency trading.
The Justice Department said it is concerned that crypto-assets may be funding terrorism and money laundering, adding that it would be requiring trading platforms to collect information on who’s buying and selling bitcoins in much the same way as banks do with stocks and bonds.
But the anonymity and privacy in digital currency transactions along with its convenience for international trade have for long been the major selling point with cryptocurrencies. And the talk of regulations has done nothing but jolt the market and weaken investor confidence.
- High Power Consumption
The process of mining or generating new units of bitcoin requires enormous amounts of energy for solving complex mathematical puzzles. Experts say these puzzles are expected to become even more complicated as bitcoin usage becomes mainstream.
According to some estimates, bitcoin currently consumes about 61.4 TWh annually, more than enough to power a developed nation like the Republic of Ireland.
Analysts say the current high levels of energy consumption are unsustainable warning that if the price of bitcoin went up to $1.1m, it would require almost all the electricity currently generated in the world to support itself.
Already the authorities in some countries have announced restrictions to the activities of bitcoin miners with utility regulators in one Canadian province saying that it would “temporarily” stop accepting energy requests from cryptocurrency mining companies” so that the company can continue to fulfil its obligations to supply electricity to all.
- Cold Treatment from Institutional Investors
Early in 2018, American billionaire and founder/CEO of Berkshire Hathaway told a meeting of close associates that “Cryptocurrencies will come to a bad ending.”
Buffett, who is renowned for his prescient investment decisions said in an interview with CNBC, that he said his company did not own any cryptocurrency and was avoiding taking a position in them.
His sentiment appears to be shared by many institutional investors who have demanded for stronger regulations as a condition for their entry into the market.
- Declining Transaction Volumes
When bitcoin prices crashed in late December just after reaching a record high of $19,000 the average number of daily trading took a plunge with it, and by February transactions had fallen to a half of the volume in December, even though bitcoin prices had rallied somewhat.
While the decline in prices may itself be to blame for lower trading volumes, experts say this may be due to the fact that websites that once allowed payment only in Bitcoin now accept a much wider range of digital currencies.
They add that the increased network speed which has seen the number of transactions waiting to be officially recognized by the Bitcoin network drop from a seven-day average of 130 million bytes in early January to about 35 million could be another explanation for the fall in transaction volumes.