Why did cryptocurrency markets only crash?

End of a soaring flight : Why the Bitcoin course is crashing

A joke made the rounds on Twitter on Thursday: Black Friday started a day earlier for Bitcoin. The cryptocurrency is suddenly so cheap again. Because the price collapsed overnight. While a Bitcoin cost more than $ 19,500 on Wednesday, which is more than in three years, it was only just under $ 14,400 on Thursday. This crash was preceded by a real rally. Just two days ago, the cryptocurrency hit the $ 19,000 mark and was on the verge of reaching a new record.

With the reset, a pattern is now repeated. Because it is far from the first time that the price of the cryptocurrency rises rapidly and then collapses. Investors and speculators alike buy Bitcoins until the price is so high that the majority no longer believe in any further price increase. Then many get out abruptly, which causes the course to collapse. That means: With cryptocurrencies, a financial bubble regularly forms, it bursts, and then a new bubble forms.

Financial experts mainly have a psychological explanation for this: Many investors are driven by the fear that they might miss something. They call this the Fomo effect, which is the abbreviation for the English term ("the fear of missing out"). "No asset class in the world is as exposed to Fomo as Bitcoin," says US investor Brian Kelly.

That is why you can see these enormous price fluctuations: The more the price of the cryptocurrency rises, the more investors want to get involved, whether they are familiar with the market and can assess the risks or not - until the panic takes over and many get out again.

Will trading with cryptocurrencies be suitable for the masses?

The price for cryptocurrencies has recently been driven by two developments in particular: On the one hand, professional investors are increasingly entering the market. Due to the low interest rates, pension funds and family offices that invest the money of wealthy families also buy bitcoins. On the other hand, the news that the US payment service provider PayPal is now also offering trading in cryptocurrencies has provided a boost.

In the US, customers have recently been able to buy and sell Bitcoin, Bitcoin Cash, Ether and Litecoin using their PayPal accounts. You can also pay online with digital currencies. In the first half of the new year, PayPal plans to offer this service in other selected countries as well. The payment provider still leaves open which ones will be.

"For the industry, PayPal's entry into the crypto business could have a signal effect for other companies that have been pondering the implementation of digital currencies for a long time," says analyst Timo Emden. Like PayPal, the financial service providers Square and Robinhood Markets have already entered the cryptocurrency trade. However, they do not have as many customers as Paypal with its over 300 million accounts. So far, consumers have had to register to buy Bitcoin and Co. on special exchanges. But many have shied away from that. On the other hand, many already have a PayPal account.

PayPal is buying up bitcoins on a large scale

However, in order to be able to get involved in the market, the American payment service provider has to meet certain requirements: for every virtual bitcoin that a customer buys via the platform, he actually has to hold a bitcoin. It's like the bank has to put a coin in the safe for every euro that a customer has in the account. In order to enable customers to trade in cryptocurrencies, PayPal has to buy them on a large scale itself - and it does so. According to the investment company Pantera Capital, PayPal has recently bought around 70 percent of all Bitcoins that have come onto the market. That too could have contributed to the recent price hike.

But even if Bitcoins are now easier for investors to acquire, consumer advocates urge caution. "We see so-called crypto currencies as a financial investment for asset accumulation critically," says Niels Nauhauser from the consumer advice center Baden-Württemberg. “Their value depends solely on what value people will attach to crypto money in the future.” This also applies to paper money. But that is why there are also central banks behind the dollar or the euro, which control price stability and intervene in a guiding manner if there is any doubt. Bitcoins, on the other hand, can only be used as long as you can find a contractual partner who accepts them. “From a legal point of view, it's not about money,” warns Nauhauser.

Supporters of crypto currencies, on the other hand, like to talk about digital gold: They consciously buy bitcoins in order to become more independent from traditional currencies. Consumer advocates, however, see a crucial difference to precious metal: "Unlike gold, for example, cryptocurrencies have neither a material value nor a historical price development that could provide clues for risks and returns."

In view of the growing number of cryptocurrencies, the risk of irrational exaggerations in price developments is also great. In addition, depending on the platform, investors would not be appropriately informed about the risks before buying cryptocurrencies. "The sales take place entirely outside the legal framework for speculative investments," says Nauhauser.

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