Has cryptocurrency come full circle?
Bitcoin, the pater familias of digital currency, once started out as a theoretical idea in a research paper.
It then got made into something “real” (as far as something that only exists in cyberspace can be classified as real anyway).
Initially the exclusive playing ground of computer wizards, bitcoin and thousands of other digital coins became part of the mainstream.
A growing group of companies and individuals started accepting payment in cryptocurrencies…
At the same time cryptos were given everything the other asset classes had to make it easier to invest in them.
Crypto exchanges, crypto futures, crypto growth funds, and yet-to-be-approved crypto exchange-traded funds (ETFs) were all supposed to make cryptos more credible investments.
Last year investors rode the crypto tides onto fortune. This year returns in the cryptocurrency markets have ebbed, and so has investor interest.
Now that investors have lost their appetite for these virtual coins, cryptocurrencies are handed back to academia.
Nobel Prize-winning economics professors like Alvin Roth, Oliver Hart, Eric Maskin and Christopher Pissarides are drawn to the field.
Is crypto back where it started – a curious subject matter for academics – or is this an extraordinary buying opportunity?
The crash nobody talks about
As high as cryptocurrency valuations soared in 2017, just as hard they came crashing down to earth in 2018.
After the hype died away, concerns about security flaws, market manipulation and stricter regulation got the upper hand once more.
Investors are cutting their losses, initial coin offerings (ICOs) are falling flat.
ICOs are the crypto equivalent of public offerings made by companies.
In August the money raised through these crypto flotations hit a 16-month low at $326 million. In January and February, ICOs still raised around $3 billion.
The price of the biggest cryptocurrency, bitcoin, has fallen more than 60%. It’s trading at $6,574 today, down from $17,135 in early January.
The MVIS CryptoCompare Index had even fallen 80% last month compared to its January high. It makes this year’s crypto sell-off officially worse than the dot-com crash, percentage-wise.
The sell-off in internet companies took the Nasdaq down 78% in 2000.
And yet nobody is talking about cryptocurrencies. Not in a good way, like last year, but also not really in a bad way.
“There is only one thing in life worse than being talked about,” said Oscar Wilde, “and that is not being talked about.”
The world seems to have moved on from cryptos. It was fun while it lasted…
But why isn’t the Great Crypto Crash of 2018 all over the news?
One reason is that the cryptocurrency markets don’t handle as much cash as stock markets.
The $640 billion lost in the crypto markets since January is no small amount, but it’s not of the same magnitude as the trillions wiped off the Nasdaq when the dot-com bubble burst.
Another reason is that there has – thankfully – not really been any contagion to other markets.
Because the links between cryptocurrencies and the traditional financial system are still rather weak, the sell-off in cryptos hasn’t led to a sell-off in other markets.
If it had, the world would have looked a whole lot different.
For the moment, the 2018 crypto sell-off appears to go down in history as the 80% crash nobody cared about.
Two types of crypto investor
“It’s easier to fool people than to convince them that they have been fooled,” said Mark Twain.
Is that what’s happening in the crypto markets?
A group of crypto bulls refusing to see they were wrong about a risky investment, while the rest quietly sells out of the market and moves on.
To be sure, a great number of people rushed into a speculative investment that they didn’t fully understand other than that it was going up.
In this sense, cryptos have so far been exactly like the dot-com hype.
The question on the minds of many must be: was 2017 as good as it gets for crypto or is this the best buying opportunity to get into the market before it shoots back up?
Khashayar Abbasi, editor of Cryptocurrency Profits, believes things might have to get worse still before they get better:
“It’s possible bitcoin could go back down to 5k, then 3k and even 1.8k, before shooting back up again.
“Medium term I believe bitcoin will have a run up again in anticipation of an ETF which will probably get approved Q1 2019. This is likely to cause a rally in alt coins too.”
Until other cryptocurrencies manage to step out of bitcoin’s shadow, the crypto markets are likely to follow the performance of the world’s biggest and best-known coin.
As long as bitcoin is in a funk, it’s likely to drag down the valuations of other cryptocurrencies with it.
What about the long-term outlook?
“From the thousands of coins, there will be a few that will rise to become the mammoth companies of the future,” says Khashayar.
“I believe that the prices of cryptos will begin to stabilise once individuals and businesses start using the coins for their intended purposes and it becomes almost ‘the norm’ to do so. That is when they will trade like mature stocks.
“Those in the industry believe that we are 3-5 years away from the above scenario.”
Until cryptocurrencies are actively being used and adopted in the real world, investors in these digital tokens are in for a wild ride.
There appear to be two types of crypto investor: one who never expects to see the invested money again and the other who’s still convinced the crypto markets lead to fortunes.
It’s the only reason I can think of why nobody seems to care about this year’s 80% plunge in the crypto markets.