Bitcoin bloodbath continues

The bitcoin pullback has turned into a bloodbath. The cryptocurrency is down more than 25% from its all-time highs, although over a month is still up 61%, such has been its heady rise.

And therein lies part of the problem, with many new investors pushing up the price at what today turns out to be high entry points. The phrase "up like a rocket down like a stick" springs to mind as bitcoin struggles to stay above $13,259, when last Sunday it breached $20,000 on some exchanges.

It has bounced back somewhat at the time of writing to now trade above $14,500, in a volatile session.

A repeat of the Thanksgiving holiday phenomenon that, by all accounts, saw feverish conversation at the dinner table about fabulous bitcoin gains, stoking "fear of missing out" buying among those on the outside looking in, will likely not be repeated at Christmas, it would appear.

Indeed, if the selling momentum continues, then the $13,000, then the $10,000 finish for the year may even be in danger.

In our report earlier this week, we asked whether it was a correction coming or a buying opportunity.

Well, the correction is now in full swing, with lots of buyers at entry points above the psychologically important $10,000 mark who are bailing out to protect their paper profits.

Bitcoin has seen five crashes of more than 70% from its highs since 2010, so those who have been in the market during that period will be a little blasé about the current selling, unlike the baptism of fire being experienced by newer investors.

However, when the dust settles buyers will re-enter. Before they do, however, market participants need to take a close look at what's happening with bitcoin fundamentals.

Bitcoin's scaling problem has come back to bite it.

Bitcoin needs to increase its block size for handling transactions in a hurry, but there is a civil war between the core developers who look after the code and the industry's exchanges, and other service providers as well as the miners who verify the transactions.

The SegWit2x proposal that was aborted in early November is now back on the agenda for another go, with a fork scheduled for 28 December.

Even if that software tweak is taken up this time, it is little more than a half measure, as transaction fees surge past $40 as they have done in recent days, with confirmation times widening from hours, which was bad enough, to days in many cases.

The bitcoin network is broken as far of being a cash equivalent is concerned. That's why some are looking to so-called second-layer solutions, where smaller transactions are handled off-chain. This is what the Lightning Network is aiming to do, and its recent tests were a success. You can even do a transaction on its test network – https://htlc.me/.

If a fix doesn't come soon, then the bitcoin v Bitcoin Cash tussle will continue. Bitcoin has 1MB blocks but Bitcoin Cash, which forked from the bitcoin chain on 1 August 2017, has 8MB block sizes.

Bitcoin Cash is thought be favoured by Asia-based miners and has the backing of Roger Ver, otherwise known as "Bitcoin Jesus" because of his long-term evangelism around bitcoin.Ver is also the chief executive of bitcoin.com.

In remarks to CNBC on Wednesday, Ver said: "You might want to consider holding your bitcoins on your exchange, so if there's a mass exodus of people rushing for the door, your money will already be on the exchange, so you can sell your bitcoin core coins for more bitcoin cash or whatever else you want."

There will also be further forks to create yet more bitcoin variants. We already have Bitcoin Gold, Bitcoin Diamond, United Bitcoin, Bitcoin Hot, BitcoinX and Super Bitcoin. Also, beyond the bitcoin chain the differential value of altcoins will likely rise in relation to bitcoin.

Bitcoin's network effect means it will still be the big kid on the block, but in terms of its functionalty as a form of money, it is more akin to gold bullion than it is to cash; don't try spending it or moving it without making timely preparations.

Predictions earlier this week that bitcoin could reverse 50% are looking realistic.

A feeling of capitulation in the market is seen in the breakdown of the rotation into altcoins that has accompanied Bitcoin's decline up until today.

The top 100 cryptocurrencies ranking table, according to Coinmarketcap.com, is a sea of red but there is one notable development: Ripple is turning into a safe haven asset in cryptoland.

Ripple has broken through the $1 barrier, up 40% yesterday, although has fallen back to $0.97 at the time of writing. With the exception of Electroneum and HempCoin, every coin in the top 100 is flashing red.

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.