It’s no secret that cryptocurrencies are getting crushed, although the media has stopped covering its demise. Here are some initial headline figures – Bitcoin is now trading below $7,000, Ethereum now well below the $400 mark with the total market capitalisation of all digital currencies just below $250bn. This is all post the ultimate pump and dump which saw a market cap for all cryptos at $830 billion, gains (for some) of 35,000% and investors riding the gold rush wave which was greater than the Dutch tulip mania.
Since that January euphoria fueled thanks to mainstream media’s coverage, the market has cooled by some 85% losing billions of dollars of value in the process. The question is, are we witnessing a necessary market correction or just the beginning of the end for Cryptocurrency.
Let’s not get dramatic
Its key to keeping an element of realism, this is still an enormous market. Bitcoin tops the list of cryptocurrencies by market cap, despite over halving, is still up over 10% since the beginning of November 2017. To give context to other capital markets, the Dow Jones Industrial Average has only gained 3% over the same time points. Simply put, you are still outperforming the Dow 3X by investing in Bitcoin. Admittedly, it’s hard to stay positive when you may have had gains of 10X/100X and a paper net worth into the millions to now be happy to “just” double your money.
Strong fundamentals and application but…
There are so many benefits and applications to cryptocurrency for the future but there are still serious weaknesses and concerns. The astronomical price gains witnessed the latter half of 2017 were not in correlation with any tech updates or obvious catalysts. Both Bitcoin and Ethereum still have scalability issues, as do other tokens on the market.
However, solutions are being presented and evolution is taking place. Bitcoin has a Lightning network in beta which essentially centralises bitcoin by having “channels”, which will function as mini-reserve banks. The Lightning network can execute payments cheaper than the currency Bitcoin blockchain. Meanwhile, Ethereum is also experimenting with sharding, Plasma and the Raiden network – all of which are designed to improve the platform’s scalability and transaction speed.
It’s always rumoured banks, hedge funds and management firms are looking at investing into Crypto but until cryptocurrencies can be freely traded without an exchange hack every month, institutions cannot and will not, invest client money in the crypto space. This leads to a regulation discussion, also not great for the price movement of coins.
Greater fools theory
The greater fool theory states (as defined by Google) that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price. In short, a herd mentality.
Some institutional money began entering the cryptocurrency market towards the end of 2017, most of the cash that has poured into the emergent asset class likely belongs to individuals. Given worldwide low-interest rates, investors were eager to pour into an asset that could deliver some quick gains. The dream of a “get rich quick scheme” was a genuine reality.
Things have changed. The music has stopped, the gains lost, dreams over and reality has set. Positions have been cashed out and for late adopters, significant cash lost.
The evidence for the calm comes in the form of data from Twitter shows that there has been a steep drop in the number of tweets mentioning bitcoin. Similarly, Google Trends states that search volume for cryptocurrencies is just a fraction now of what it was back in December 2017.
Slightly a chicken-and-egg situation; less interest in cryptocurrencies could be due to prices falling – or vice-versa. However, since much of the money in cryptocurrencies belongs to retail investors, simply connecting the dots does seem to suggest that the public has simply lost interest in digital currencies. And this is all without the ability to “short” cryptocurrencies which would compound the issue.
Rumour and red flags
Despite all the talk of regulators clamping down on virtual currencies, no nation apart from China and rhetoric from South Korea has taken significant steps towards banning them.
We covered the obvious interest in crypto by the South Koreans here.
The rumour that South Korea’s finance ministry was going to ban cryptocurrency trading, there was public outrage. The market also had a tree shake after India’s finance minister Arun Jaitley slagged off bitcoin. Although Jaitley seemed bullish on the idea of cryptocurrencies, his language and tone were interpreted as being a sign that India would look to ban.
In the UK, Mark Carney recently spoke out on the need to “regulate elements of the crypto-asset ecosystem to combat illicit activities”. This noble and does hold an element of truth with bitcoin known to fund terrorism, purchase illegal drugs and launder money. Yet, no more than the US dollar, it’s just “easier” to trace.
The commentary that regulation is necessary; it is a question of how much and when. If countries were going to ban cryptocurrencies, surely they would have done so by now or been more aggressive in doing so. Bitcoin has taken 10 years to get this point.
What goes up must come down
To forecast where the cryptocurrency market is going, it’s necessary to look at where the market has been, but also how it arrived there. While the causes of the meteoric rise in cryptocurrency prices are unknown on analysis its two factors – media hype and futures trading.
Its not rocket science, nothing entices the casual investor faster than the promise of easy money. As the price of Bitcoin and other cryptocurrencies began to rise, major media outlets covered the drama. More marketing, more exposure, more buys, higher prices. Those investors, many of whom had only a passing understanding of the technology started to take punts and hoped for the best. The complete opposite of regular trading
Then, major futures exchanges began to issue Bitcoin futures contracts, which allows a wider demographic to start buying into the cryptocurrency market and $75m in contracts traded on their first day.
Straight trading: profit-taking
By mid-December of 2017, there were signs that the bottom was about to fall out. This happens typically after a surge in any stock after an RNS for example. Investors take their gains. Once cryptocurrencies began to post record highs, investors began a wave of profit-taking that started to push prices lower. Once the average “investor” began to panic sell, the rout was on. The resulting downward spike led to the bleeding we see today in the cryptocurrency market, but that may not be a bad thing for future investors.
Essentially, prices are 90% lower than they were and in comparison, you aren’t paying a premium. Fundamentals haven’t really changed. Some scams have been revealed, countries have shown their cards with regard to regulation. We have learnt a lot, things have come out in the wash but the target prices have been reiterated and applications are still valid. Like any trading plan, its when you buy as much as when you sell.
The short/mid-term future
While the short-term losses have been shown as a nightmare, and there is truth behind that. But now that the hype has cooled, some institutional investors in the U.S. are beginning to look at increasing their cryptocurrency holdings with cheap or cheaper stock. Platforms are not overwhelmed with 40,000+ signups a day anymore. This is a dose of stability and venture capital investments in crypto startups are expected to rise this year, as the value of the underlying technologies remains clear.
The tech bubble was different as a vision and solid prediction could be made based on the infrastructure in place i.e. computers. There are no blockchain revenue models that can be analysed to assess whether cryptocurrencies are a viable investment proposal. Moreover, there is no guarantee that blockchain technology will reach mass adoption or how it will happen.
All of this adds up to a conclusion that the cryptocurrency market isn’t dying but here to stay, it feels like it is getting its issues out in the wash early and providing sharp learning curves on how the market can react. For investors, the days of “to the moon” are realistically never coming back, but that there’s still money to be made for those that are willing to “HODL.”