What caused bitcoin's recent big selloff?

2 December, 2018

If you follow the daily ups and downs of Bitcoin, then you know that a huge selloff began on November 14 (2018). Bitcoin began that day with a value north of $6,300 only to plummet to around $3,300 on November 27. Prices did not begin to stabilize around the $4,000 mark. The consensus is that things have now quieted for the moment.

The task now is to determine what caused the big selloff. We need to know this to see if there is any way to prevent a similar event in the future. So, is there an answer? That depends on who you ask. According to a Silicon Angle article from Duncan Riley, the big selloff was all a result of an internal squabble within the Bitcoin Cash (BCH) camp.

We will explore that squabble to try to determine if Riley's supposition has any merit. If it does, what Riley asserts reveals a characteristic of cryptocurrency that is eerily similar to both fiat currencies and securities. It is a characteristic that could spell danger for crypto if someone doesn't find a way to counteract it.

The Bitcoin Cash squabble

The aforementioned squabble was between two camps that have very different visions for Bitcoin Cash. The one camp, led by a prominent crypto evangelist named Roger Ver, advocated for a fork of the current BCH protocol in order to create what Ver refers to as Bitcoin ABC. The fork would mature BCH from a strict currency to a broader financial platform.

The other camp asserted that the current protocol should be maintained as is. It is led by Australian Craig Wright, by the way. At any rate, both camps claimed ownership of the Bitcoin Cash Name. Ver's position was that, since his group controlled Bitcoin Cash, it could create the fork and keep the name at its discretion. The Wright camp did not dispute the fork, only that the original name should go with the fork.

One of the most interesting aspects of the dispute is the fact that Bitcoin Cash is, itself, a fork of the original Bitcoin. This is not surprising to people who follow cryptocurrency. Forks happen all the time; it's no big deal. So why was this internal squabble the alleged source of Bitcoin's recent selloff? According to Riley, the dispute caused market panic.

For the record, Wright's camp eventually conceded to Ver by saying that Bitcoin Cash SV would no longer lay claim to the original BCH name. That leaves Ver and the fork he supports - known as Bitcoin ABC - as the official Bitcoin Cash. Bitcoin Cash SV now becomes the derivative and will be known as BSV.

Who owns what

Riley says that cryptocurrency owners panicked over the extended dispute between Ver and Wright, thus starting a selloff that gained momentum with each passing day. Over the course of two weeks, nearly every cryptocurrency in the market lost quite a bit of value. But that still doesn't explain what's going on. For that we need to go back to Bitcoin and the fork that created BCH.

A few years back, a number of developers responsible for maintaining Bitcoin were concerned that its blockchain was becoming unmanageable. They wanted to tweak the blockchain with some needed adjustments in order to limit the size of individual blocks and speed up transactions. Unfortunately, there was no clear consensus among the powers that be.

The result was a fork of the original Bitcoin blockchain to establish Bitcoin Cash. So far so good. But here's where it gets interesting: everyone who owned Bitcoin at the time of the fork was also given an equal amount of Bitcoin Cash. BCH developers had to do this in order to maintain the integrity of the fork.

This created a situation in which Bitcoin and BCH were intrinsically connected from the start. Any change in the price of Bitcoin would automatically influence the price of Bitcoin Cash. Fast forward, and you see the same kind of situation with the BCH fork.

Any fork of BCH would have to account for current coin holders. That is not necessarily a problem except for the fact that the two camps couldn't agree as to which one would retain ownership of the original BCH. That led to uncertainty among investors over who actually owns what.

Uncertainty leads to selloff

Now, imagine you own quite a bit of Bitcoin Cash when you first learn of the disagreement back in mid-November. You are convinced that there is no way the two camps can reconcile their differences to create a workable fork. What are you inclined to believe? If you're like most people, you are already thinking that your holdings are about to lose a tremendous amount of value. So you sell.

Down the street is a guy who owns an equal amount of Bitcoin and Bitcoin Cash. He also sells his BCH based on the same fears. Yet he also knows that he only owned BCH to begin as a result of the original Bitcoin fork years ago. So now he begins to wonder about the value of his Bitcoin. He sells some of it as well.

Similar coin holders all over the world have the same kinds of reactions as you and the guy down the street. Before too long, people are dumping their coin based solely on a fear that the squabble in the Bitcoin Cash camp is going to devalue that particular crypto.

What you have is market panic. It is unreasonable, but it is real nonetheless. This is the exact same thing that happens in FOREX markets and stock exchanges. People get a whiff of bad news and instantly panic. They start selling off in order to avoid heavy losses.

Unfortunately, market panic becomes a self-fulfilling prophecy. The more people panic, the greater the volume of selloffs. As that volume increases, values plummet. None of it would happen if everyone just remained calm and waited for the situation at hand to play out.

A concession saves the day

Stepping back and looking at the BCH dispute from a disinterested, third-party perspective reveals that it was foolish from the get-go. It really doesn't matter in the grand scheme of things whether Bitcoin ABC or BSV retains the official title of 'Bitcoin Cash'.

Both the original cryptocurrency and its fork will continue operating as usual with no interruptions. Coin holders will have the option to leave things as is or, if they prefer, choose one over the other. It doesn't really matter from a functional perspective. So to argue over BCH ownership was a waste of everyone's time.

It took a concession to save the day. Ironically, the concession was made by a man who is heavily involved in the online gambling space. Gambling entrepreneur Calvin Ayre is the one who stepped up and said that Bitcoin Cash SV was no longer going to fight about which camp retained the official title. That was the right thing to do.

No need to be spooked

At this time there is not yet consensus among experts that the internal squabble within Bitcoin Cash was totally responsible for the selloff that began in mid-November. It is generally accepted that the squabble at least contributed to the problem. So where do we go now?

First, leaders within the cryptocurrency movement need to come to terms with the fact that crypto is as easily spooked as any other financial market. Cryptocurrencies are investments as much as they are tools for transacting business, and investments are always subject to volatile marketing conditions.

Next, those same leaders need to recognize how easy it is to spook investors by something as simple as tweeting or posting to Facebook. There is no need for investors to be spooked, yet those in prominent positions seem to not be cognizant of how easy it is to cause panic.

Finally, investors need to calm down and take a break. Panicking over something as minor as a dispute over who will retain the official Bitcoin Cash title suggests that investors don't trust the coins they are invested in. And if that is the case, why did they buy those coins to begin with?

If cryptocurrency is ever to replace fiat currency entirely, investors are going to have to relax. They are going to have to get beyond the idea of short-term gain and start looking at cryptocurrency for the long-term. And by long-term we mean decades.

If investors want to gamble with their Bitcoin Cash, better that they make a deposit and play Mega Moolah at their favorite online casino. There they can gamble to their heart's content without affecting cryptocurrency markets.

So, what do you think? Was the squabble between Bitcoin ABC and BSV the primary impetus behind November's selloff? If not, what do you think caused it? We may never know for sure, and that's unfortunate. If we could truly get a handle on what makes investors panic so easily, we might be able to put some controls in place to better address said panic in the future.