How A Crypto Chain Reaction Could Have Been Averted
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One of the selling points of decentralized cryptocurrencies is that no one person is supposed to have an outsized amount of influence. If one whale sells his or her stash of a particular coin, other whales may hodl, or snap up that cryptocurrency at the inevitably cheaper price. The crypto chain reaction is supposed to be held in check by decentralization.
This, of course, works on the theory that most people who have been in the cryptocurrency world for a while have learned how to keep their cool when the price of their favorite coin drops by 20% or more; and that they can shrug off the newcomers who bought Bitcoin at $19,000 out of “fear of missing out” and then panic-sold when the price started dropping.
Of course, it doesn’t necessarily work out that way in the real world. Cryptocurrency is notoriously famed for the community’s reliance on rumor, #fakenews, and of course, market manipulation. Quarterly earnings may excite Wall Street, but the blockchain crowd operates 24/7 – and in an age of bleeping phone notifications about price movements, one person can, in fact, change everything.
The most recent Bitcoin price crash may have inadvertently been caused by Brandon Chez, the 31-year old owner of popular website CoinMarketCap, when he made one single tweak to the algorithm used to calculate the average Bitcoin price.
Was It FUD Or Just A F** U**?
He removed South Korean exchanges from the algorithm that tracked and averaged Bitcoin price because Bitcoin was trading at a larger than normal premium in South Korea. He just forgot to make a big announcement about it and that caused a lot of panic selling when people woke up and checked CoinMarketCap first thing in the morning.
The result was a significant dip in the price of Bitcoin – which on its own, may not have caused long-term damage. But the ancillary effect was to intensify media attention on the South Korean market – which, as the crypto chain reaction accelerated, may have led to the ill-prepared statements made two days later by Justice Minister Park Sang-ki to the effect that the South Korean government was preparing a bill to ban trading in all cryptocurrencies including Bitcoin.
The statement was later walked back.
This is why frequent communication is a good thing in the cryptocurrency and blockchain world. Many people won’t buy ICO tokens from projects that can’t be bothered to update their blogs or Medium accounts at least a few times a month, and it is unsurprising that a lack of communication from an influential website like CoinMarketCap could cause that level of chaos.
What Does This Mean for Mass Adoption?
The obvious volatility of Bitcoin may scare some people who dislike risk. But risk-tolerance is something of a natural asset to the cryptocurrency investor. That being said, extraordinary volatility based on an erroneous governmental statement and an algorithmic tweak is truly frightening for institutional clients, and can only serve to delay further adoption of the currency until some of the more egregious FUD is displaced by a sense of long-term confidence that we’re not heading for a complete meltdown.
To date, Chez has not made an official statement about his apparent effect on Bitcoin’s price, which we’re charitably assuming was unintentional on his part. Let’s say he simply forgot the importance of telling people what you’re doing if you want them to trust you.
If he had remembered to make an announcement on Twitter, and sent the news to popular cryptocurrency news sites beforehand, perhaps the damage would have been limited to newcomers who don’t follow Bitcoin news very closely. Perhaps legions of crypto reporters wouldn’t have been pestering the South Korean Justice Department.
And perhaps right now, everyone with a long position in Bitcoin would be about 8% wealthier.