Crypto price crash: Warning sign or buying opportunity?

Bitcoin and ether, the two most popular digital currencies, have seen price crashes of 17% and 26% respectively over the past two days, according to the Coindesk price index.

The sharp reversal impacted most other cryptocurrencies, with 48 out of the top 50 by market capitalisation suffering losses, among them third-placed Ripple which fell back from a high of $0.32 on 1 June to $0.26 today, a drop of 18%.

Ether, the coin used to power the Ethereum blockchain platform, has seen demand mushroom in recent months on the back of growth in so-called initial coin offerings (ICOs) by projects being built on the platform.

Investors hoping to find the next big thing use the ether currency to buy tokens in these speculative projects. Most of the companies behind the blockchain applications have no customers or revenues as yet.

But in a hit to sentiment, last week ether fell victim to a 'flash crash', which saw its price briefly collapse to a low of 10 cents from over $300. The drop has subsequently been blamed on a large multi-million dollar sell order on the GDAX exchange. That – plus the Ethereum network becoming clogged up by investors buying into ICOs – has brought to market participants' attention the possibility that Ethereum may be running into the same transaction 'scaling' issues which have dogged bitcoin.

A number of exchanges stopped trading in ether as a result of the crash, while others became unreachable. For example, Coinbase, the biggest US-based dollar exchange, temporarily stopped trading ether. Coinbase owns the GDAX exchange.

GDAX vice-president Adam White initially told customers who saw their stop-losses taken out by the flash crash that losses would not be refunded, but has since gone back on that, much to the relief of traders nursing large losses. At the time of writing ether is trading at $247.

The cryptocurrency world has been through sharp price reversals before, and this latest one appears to be driven by profit-taking in response to all-time highs hit by the leading currencies a month ago.

Peter Van Valkenburgh, director of research at Coin Center, told MarketWatch that investors should not "fixate on price movement over a single day" and recommends investors "zoom out of the price chart and look at the broader trend".

Likewise, Charles Hayter, chief executive of the CryptoCompare platform, thinks "a correction of sorts was [in] the cards" in comments made to cryptocurrency news site Coindesk, given the easy gains that seemed to be on offer, which, in turn, enticed many new entrants into the market who may have left just as quickly.

Portfolio rebalancing is also thought to have played a part in the price falls as investors see the value of their cryptocurrencies rise as a proportion of their portfolio, pushing some into switching a portion of their crypto gains into fiat currency.

Investors tempted to sell out can perhaps take comfort from a recent research note from Goldman Sachs' chief technician Sheba Jafari, which sees buying opportunities for bitcoin in the $2,330-1,915 range. However, if the price falls below those support levels, the market could be looking at a serious correction that puts bears in the driving seat as opposed to merely a pattern of extreme volatility in a bullish secular trend.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.