2018 has been a miserable year for cryptocurrencies, as prices have dropped by as much as 70% since their highs since the start of the year. The market capitalization of the entire cryptocurrency market fell from a little over $800 billion in January to a low of $250 billion, fueling an atmosphere of anxiety, fear and doubt towards cryptocurrencies. For those that invested in Bitcoin at it’s height of $19,000 in January and held on to it at its current price of around $8,000, it is pretty clear why many has pointed to the popping of the cryptocurrency bubble.
Unlike stocks and bonds, it is extremely difficult to quantify the value of cryptocurrencies. According to many experts, the radical volatility of cryptocurrencies and the trading practices in many unregulated exchanges makes it prone to a high degree of manipulation. The absence – or limitations – of various metrics to measure the adoption rates and growth indicators compounds the issue; that is why many refer to the cryptocurrency space as the ‘wild west’ of the investing sphere.
A bubble – in the economic context – is usually defined as the movement of asset prices way beyond its intrinsic value. It’s easy to understand what comes next. This unsustainable bubble will ‘pop’ when the market panics and tries to pull out, leading to a carnage. This is exactly what we’re seeing now.
Keeping Prices in Check
It is important to keep in mind that at the peak of the cryptocurrency frenzy back in December 2017, the prices of cryptocurrencies and tokens were exponentially increasing in a short amount of time. It was normal for prices to double or triple in a span of only a few days, and it seemed that there was no stopping the craze that has taken the world by storm.
Taking Ethereum (ETH) as an example, it’s prices increased from $7 at the start of 2017 to over $1,400 by year’s end! That’s a staggering increase of over 5,700% in 2017. Clearly, that isn’t something that is sustainable in the long-run and many opined that it was only a matter of time before prices started correct itself. Nouriel Roubini of Roubini Macro Associates mentioned that Bitcoin is the “mother of all bubbles,” and its bubble is now bursting, speaking in an interview on Bloomberg Television. He also added that “virtually every” Group of 20 country is talking about cracking down on the phenomenon as policymaker grow worried.
Playback of Negative News
Perpetuating the correction could be attributed to a series of events by regulators’ stance towards cryptocurrencies. The harsh outlook from Chinese and South Korean regulators – which constitutes a huge portion of the trading value for cryptocurrencies- had caused uneasiness in the market. Chinese regulators escalated the crackdown on cryptocurrency trading, targeting online platforms and mobile apps that offer exchange-like services. A similar stance was also afforded by South Korean authorities when they planned to ban cryptocurrency trading after raiding local exchanges on alleged tax evasion.
Aside from major Asian countries, Russia signaled that it could start cracking down on cryptocurrencies, prompting Russian President Vladamir Putin to state that “legislative regulation will be definitely required in future” for cryptocurrencies.
On the corporate front, Facebook had opted to ban any ads affiliated with cryptocurrencies or Initial Coin Offerings (ICO), under the banner of eradicating ‘scams and frauds’ plaguing the cryptocurrency market. In fact, other tech giants such as Google, Twitter and Mailchimp have also joined forces to ban advertising of cryptocurrencies on their platform. This is a significant blow the cryptocurrency market that could potentially curb awareness and adoption.
All that being said, the reduction of prices across the board should not be an indicator of an absence of value in cryptocurrencies or even – in the worst-case scenario – of them being ‘scams or ponzi schemes’. It is important to note that Bitcoin and cryptocurrencies in general are in their infancy stages, backed by a revolutionary technology that could potentially disrupt a great bunch of industries. the problems that cryptocurrencies aim to solve, such as international money transfers and blockchain-based smart contracts, justify its use and prove their value. These fundamental reasons should be the proxy of the success of this space, not the volatility of cryptocurrency prices fueled by speculation. It is only a matter of time before this vision is realized.
Many suggested that early-stage technologies are often subjected to a high degree of volatility and risks, such as the internet when it first gained mainstream adoption. The internet hype that led to dot-com bubble and its subsequent burst did not signal the death the internet. At that point of time, it was hard to imagine what mainstream adoption of the internet would look like. Now, the internet represents an ubiquitous part of our lives.
Corrections are a key component that aids in the maturation of cryptocurrencies as an asset class. A high-level of speculation in an infant market is normal, given the lack of track record and the seemingly high risks involved.
As the market continues to mature and grow, it would progress to be more complex as differentiation of assets starts to be priced in. Ultimately, the best way for the retail masses to participate in the cryptocurrency market is through professionally-managed investment vehicles, in a bid to mitigate and diversify the risks. A good indicator of a maturing asset class is the emergence of investment products that provides investors with better risk-adjusted access. We can already see that happening, as many institutional players are looking to explore the nascent industry with a great deal of opportunity.
The recent price decline may be a painful for many investors in the nascent cryptocurrency market. However, it should be pointed out that cryptocurrencies are a paradigm shift that has the potential to revolutionize our world. Regulatory actions by governments could actually help in laying the groundwork for cryptocurrencies and Blockchain to come back bigger.
Aziz Bin Zainuddin is Founder & Chief Crypto Officer of Master The Crypto, a knowledge hub and resource center for all things blockchain & cryptocurrency related. His is also an active cryptocurrency trader.