Bitcoin Plunges Below $4,000, Is It Technical Selling Or Something Worse?

Bitcoin plunged once again over the weekend and is now trading for less than $4,000 for the first time since September 2017. Most other cryptocurrencies are faring just as poorly or worse, and in total, more than $700 billion in market cap has been wiped off the cryptocurrency market since the late-2017 peak.

This article originally appeared in the Motley Fool.

Some experts argue that this is merely a technical correction, caused by a flurry of stop-loss orders. Others say that regulatory concerns and a continued lack of institutional money are also to blame. And many people simply believe this is the beginning of the long-awaited crypto-crash that many high-profile investors and executives have predicted.

Today's cryptocurrency prices

As I mentioned, most cryptocurrencies finished the weekend in the red. Excluding dollar-tied coins like Tether, here's how the largest cryptocurrencies are doing today:

The technical argument

While most cryptocurrency experts agree that there have been a few negative catalysts recently (we'll get to those in the next section), many say that the big swings we've been seeing can be attributed to automated selling based on stop-loss orders.

If you aren't familiar, here's the basic idea of how a stop-loss order could work. Let's say that when bitcoin was trading for about $6,500, I thought it would rise to about $8,000 in a short time. However, to limit my downside risk, I set an order to automatically sell my coins if the price falls below $6,000.

When orders like this are triggered, they can result in massive amounts of coins (or stocks) hitting the market at one time, as traders tend to set stop-loss prices at nice round numbers like $6,000, $5,000, or, most recently, $4,000.

Other negative catalysts

As I said, cryptocurrency experts generally attribute the recent declines to a combination of negative (but temporary) catalysts and stop-loss selling. With that in mind, here's a rundown of the major negative factors that could have been weighing on cryptocurrency prices recently:

• Worries about the now-completed "hard fork" (similar to a stock split or spin-off) in bitcoin cash were blamed for the initial declines from the relatively stable prices throughout October and early November.
• Bitcoin's "hash rate" -- that is, the combined computing power that bitcoin miners are using to create new coins -- has been falling. Bitcoin's hash rate is a good indicator of how much money, time, and resources people are willing to use in order to create new coins, so a lower hash rate can indicate falling interest.
• Regulatory scrutiny has increased recently. The U.S. Justice Department is currently investigating whether last year's parabolic rise was due to manipulation, and the SEC recently issued its first civil penalties against cryptocurrency founders.

The beginning of the end for crypto?

Finally, many people believe that this is just the beginning of a long-awaited cryptocurrency collapse. Many high-profile investors and financial industry heavyweights, such as billionaire investor Warren Buffett and JPMorgan Chase CEO Jamie Dimon, have publicly spoken out against bitcoin and other cryptocurrencies and have expressed their beliefs that many or all cryptocurrencies will end up being essentially worthless. And this recent wave of declines has prompted some to renew their bearish calls.

Which side is right? Is bitcoin's drop a technical correction that was triggered by negative but temporary issues, or is there still a long way to go before the dust settles?

Matthew Frankel, CFP has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has a disclosure policy.