Digital currencies experienced significant volatility in December, with many cryptocurrencies suffering notable declines and then enjoying even more impressive recoveries. When explaining these price movements, analysts pointed to variables including technical support, sentiment and a year-end rally caused by traders closing out short positions.
The broader cryptocurrency market fell more than 25% during roughly the first half of December, according to the MVIS CryptoCompare Digital Assets 100 Index (MVDA), a key benchmark based on the value of the top 100 largest digital assets.
This market index then surged nearly 45% in less than 10 days, before losing some of these gains and finishing December down 8.5% for the month.
The world’s largest digital currency by market capitalization (market cap) also suffered some sharp price fluctuations in December, dropping to $3,169.53 on the 15th of the month, CryptoCompare data shows.
At this point, bitcoin was trading at its lowest value of 2018, representing a roughly 24% decline from the start of December and a more than 80% drop from the digital currency’s all-time high reached in January 2018.
The cryptocurrency then proceeded to recover, rallying more than 35% in less than 10 days to reach an intra-month high of more than $4,300. Bitcoin prices then fell back, finishing December at roughly $3,750.
Bitcoin Cash, a fork of the original bitcoin, suffered even more intense volatility during the month. The alternative protocol asset or “altcoin” fell to as little as $73.83 on December 15th, a roughly 63% decline from its starting price of $199.67.
The digital currency then mounted an impressive recovery, climbing more than 200% to $231.40 on December 20th. In the following days, it gave up some of these gains, closing out the month at $159.95.
Ether, the digital token that fuels the Ethereum platform, also suffered a notable decline early in December, falling to $82.08 on December 6th, a roughly 31% drop for the month. Between then and the 24th of the month, the token’s price nearly doubled, rising to $161.25.
The ether token has frequently held the number two spot in terms of market capitalization, although recently, it has struggled to maintain this position.
EOS, a digital token used to power a decentralized application platform, fell close to 50% between the start of the month and December 7th, when it reached $1.55. After dropping to this intra-month low, the token rose more than 100%, hitting $3.20 on December 24th. The digital asset then proceeded to decline slightly, finishing December at $2.66.
XRP, the digital token created by the founders of Ripple, followed a pattern similar to that of bitcoin and bitcoin cash, bottoming out on December 15th when it reached $0.2815. At this point, the token had fallen nearly 25% since the beginning of the month.
Over roughly the next eight days, XRP bounced back, rising more than 63% to reach $0.4601, before falling back to $0.3587 at the end of the month.
The major cryptocurrencies reviewed earlier in this article followed a similar pattern, suffering losses early in the month and then recovering later on. Because these digital assets followed each other closely in December, it makes it easier to explain their behavior collectively.
Some analysts pointed to the mindset of traders when describing December’s price volatility. Tim Enneking, managing director of Digital Capital Management, put it this way: The movements were clearly (if not obviously) driven by market sentiment.
Marc Weinstein, principal at Wave Financial, stated that sentiment likely played a big role in this month’s price movements, emphasizing that fundamentals remained unchanged in December. Joshua Frank, cofounder of cryptocurrency analytics platform TheTIE.io, also spoke to the key role played by the mindset of investors.
“There is strong evidence to suggest that sentiment played a large part in the end-of-year rally. Sentiment has been highly correlated with price and clearly led price action in mid-to-late December. It has also consistently been in positive territory for 2019, so we expect to see further gains in the coming weeks if this positivity continues.”
The chart below shows the relationship between sentiment and bitcoin’s market cap:
Another major variable that analysts pointed to when explaining December’s crypto volatility was technical support. Jon Pearlstone, publisher of the newsletter CryptoPatterns, elaborated on this market activity:
“Bitcoin has now built a technical base of support at $3500 level. If price breaks down below that level, there is still a ‘last chance’ support level around $3000.”
Joe DiPasquale, CEO of cryptocurrency fund of hedge funds BitBull Capital, also emphasized the strength of the $3,000 price level, describing it as a “psychological barrier” that is “difficult to break without major negative news.”
Santa Claus Rally
Some market observers also pointed to a Santa Claus Rally, an upward movement in asset values that takes place at the end of the year, as potentially explaining the gains that many digital currencies enjoyed later in the month.
“It is true that there is a holiday effect on the crypto market, where traders generally take time off ahead of Christmas and given crypto's volatility, it is better for short-sellers to close their positions (as compared to those who long) when they cannot be monitored,” said DiPasquale.
However, other analysts expressed doubts about whether the aforementioned holiday rally pushed cryptocurrency prices higher in December 2018. “The Santa Claus rally hasn't rung true in 3 of the past 4 years for traditional markets,” said Eric Ervin, CEO of Blockforce Capital.
“Given the heavy active trader and retail following in cryptocurrency, this may have been the case,” he added. Pearlstone also weighed in on the matter:
“After dropping nearly 50% from the key $6000 support level, Bitcoin rebounded in December with most of the 35% gain occurring mid-month in just a few trading days. While that timing suggests a Santa Claus [rally], it's meaningful that Bitcoin has held most of those gains through the end of the year, closing well of 2018 lows just under $4000.”