Bitcoin, Ethereum and other major cryptocurrencies recently took a nosedive in price, with some analysts warning that the market has descended into "panic mode". Of all the digital currencies, Ethereum experienced the most significant drop falling by nearly 20 per cent during a 24 hour period, to hit its lowest price in a year. Meanwhile the price of Bitcoin fell below £5000, also its lowest in a year.

It has been suggested that the latest market movements are owed to the liquidation of funds raised through initial coin offerings, meaning companies could be selling the Ethereum raised via the popular fundraising mechanism.

But the fall in Bitcoin and other cryptocurrencies shouldn’t come as a surprise. The cryptocurrency market has been under much pressure since late June, when the US Securities and Exchange Commission delayed a decision on whether to approve a Bitcoin exchange-traded fund, a move that experts believe would have substantially increased the size of the market.

The story behind the meteoric rise of cryptocurrencies heavily involves invested crypto-evangelists, selling hype to unsophisticated investors who are not knowledgeable enough to see through the inflated claims, topped with a healthy dose of greed. That is an industry predicated on huge gains, made quickly due to little or no effort at all. Much of the hype seemed to be driven by institutional money. All it takes is for that same institutional money to determine the market is overvalued (eg because the hyped claims are not being met) and seek to cash out. This then causes the unsophisticated herd to follow and for the price to drop further.

It should be a warning that the price crash followed a delay to the aforementioned regulator ruling. It is very likely that regulator action is going to increase in the feature. It is also very likely that such action will lead to increasing regulatory action and enforcement.

A much bigger issue however is when the majority of the herd investors realise that there’s a danger of a market collapse and seek to exit. If there is sufficient demand to cash out for fiat currency, there’s a danger that there is insufficient supply of fiat currencies to cash out (especially where there is a loss of confidence by potential herd investors due to a bearish cryptocurrency market). This could lead to a liquidity crash within the cryptocurrency ecosystem.If this were to happen it would likely have a knock-on effect on the ICO market that is reliant on cryptocurrencies, such as Bitcoin and Ether.

It may be that cryptocurrencies will rally (perhaps significantly) before any of the above happens. However, it is more likely than not that the above will happen.

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.