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What is causing a sharp fall in the value of cryptocurrency?

Bitcoin's value fell more than 25 percent this week.

Bitcoin's value fell more than 25 percent this week.

Dan Kitwood / Getty Images

The one-year cryptocurrency fall is turning into a further downward spiral this week. Tuesday the price of Bitcoin fell by 13% and over 25% in the week. A single Bitcoin is currently worth around $ 4,400, marking the first time that the value has fallen below $ 6,000 in months. Other less known cryptocurrencies are seeing similar drops. At $ 32, Litecoin is around the lowest value for 2018. The same goes for Ethereum, now at around $ 130.

There is a number of theories that float around the drop. One attributes the recent problems to control in front of Tether, a cryptocurrency that is presumably supported by US dollars, and the exchange called Bitfinex that created it. Analysts have long suspected that Bitfinex investors artificially inflated the price of Bitcoin during its wild expansion last year by carrying out washing operations, which in this case would essentially involve the purchase and sale of a cryptocurrency to the purpose of creating the illusion of activity. Bloomberg reported Tuesday that the Justice Department is investigating Bitfinex and Tether Ltd. to determine if people were using the Tether token to buy Bitcoins in a washing scheme. With the looming threat of an accusation, it could be that Bitcoin is approaching its real value because it is no longer artificially sustained. (Tether Ltd. rejected the allegations).

Analysts have attributed much of the one-year decline to the general threat of regulatory and law enforcement actions. There have been other recent signs of surveillance restriction beyond Tether's investigation. On Friday, the Securities and Exchange Commission fined the companies Airfox and Paragon for not having registered their initial offer of coins (ICO) – a process through which the encrypted tokens are distributed to investors – as securities. The SEC has also required that the two companies allow investors to recover their funds. This case could set a precedent for other cryptocurrency companies, many of which could go bankrupt if forced to pay similar sanctions and repayments. However, it is worth noting that the ICO market is notoriously shady: the cryptocurrency consulting firm Satis Group estimates that up to 85 percent of ICOs are scams. A study by the Boston College also found that 56% of cryptocurrency companies fall back within four months of their ICO.

Another theory is that the divisions within the Bitcoin community are triggering a massive sell-off of assets. In recent years there has been a heated debate in the cryptocurrency circles about whether Bitcoin can process only a handful of transactions per second, causing bottlenecks. In 2017, a faction of the community created an alternative version of Bitcoin called Bitcoin Cash, which can handle multiple transactions, through a "hard fork" process. Then, last week, Bitcoin Cash suffered a heavy blow. This balkanization of the Bitcoin community and the fragmentation of the currency could further discourage investors.

In this period of last year, cryptocurrencies were an international fixation because of their sky-high prices. Bitcoin has reached $ 19,783.21, its highest ever value, on December 17th.

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