Last year the cryptocurrencies were unstoppable. In just 12 months, the total value of all virtual currencies rose from $ 17.7 billion to $ 613 billion, an increase of more than 3,300 percent. These are profits that usually take decades cryptocurrency cold storage.
But 2018 was another story. It went down significantly and over the weekend, the total value of all crypto currencies fell to just over $ 235 billion, according to CoinMarketCap.com. Not only is this down more than 70% from the peak of $ 835 billion in the first week of January 2018, but also the lowest combined value for the approximately 1,600 tradable cryptocurrencies since the third week of November, seven months ago.
What is going wrong here? It is probably a combination of the following five factors.
- The proof-of-concept puzzle
Probably the biggest bright spot of the cryptocurrency revolution was the advent of blockchain technology, the blockchain being the digital, distributed and decentralized ledger that underlies most cryptocurrencies, and the processing of cash transactions without a middleman for logging data in a transparent and steady manner responsible for. For currency and non-currency applications, some people expect blockchain to change the environment in which we move money and monitor supply chains.
However, the blockchain has to overcome an almost insurmountable hurdle: the proof-of-concept puzzle. As expected, Blockchain has proven itself in countless small tests and demos by global organizations and companies. But none of these organizations or companies was willing to try the thing in reality. Businesses will not yet turn to blockchain because it’s a technology that has not proven its scalability. Unfortunately, it can only prove its scalability if companies give it a chance. This is called a dilemma, and it is possible that the blockchain will not become a differentiation factor so quickly.
- There is no defined purpose for most virtual currencies
Another problem that investors are likely to encounter is that most crypto currencies do not make sense. By that I mean that there is no growth driver and no need for consumers or businesses to switch to digital currencies, which means that traditional forms of remittances could remain dominant for the foreseeable future.
For example, Bitcoin may be the largest cryptocurrency by market capitalization, but the coin does not have much practical value. Unlike most digital currencies that are focused on their blockchain, Bitcoin is more intended as a medium of exchange. In other words, the hope is that consumers will forego the use of cash and credit cards to buy their goods and services with Bitcoin.
The question is: why should someone change? And that’s my point – there’s no good reason for that at the moment. With the exception of Bitcoin’s use as an intermediate currency, which sometimes has to be bought to buy less popular crypto currencies on decentralized exchanges, there is little reason for consumers or businesses to own or use Bitcoin. Without real benefits, virtual currencies will hardly gain in importance in the long term.
- Crypto-theft undermines the long-term security of digital currencies and blockchain technology
Apart from that, crypto currencies may not be considered safe as a result of ongoing hacks and thefts. A recent Carbon Black analysis found that $ 1.1 billion worth of virtual currency had been stolen since the beginning of the year in just over five months. In particular, 44% of these thefts were directed against Monero’s Privacy Coins, which was designed to disguise the sender and recipient of funds, as well as the amount that is being sent. Although it is a great tool for those who long for privacy, finding stolen funds makes it almost impossible.
The effects of these hacks are twofold. First, it shows that blockchain technology and krypton networks are not nearly as impenetrable as one believed. Until additional security measures are taken, it may be difficult to regain the trust of Wall Street and retail investors.
The other implication here is that things do not necessarily get better soon. A recent Securities and Exchange Commission (SEC) decision not to recognize Bitcoin and Ether as securities will cause investors to be caught in the event of fraud. Although I understand the SEC’s argument that these networks are sufficiently decentralized and therefore need not be labeled as securities, this means that the SEC will not do anything if stolen.
- There is hardly any differentiation
A possible fourth reason why the cryptos have fallen into the abyss is the fact that diversification does not really work. No matter what kind of digital currency you buy, there is a really good chance that everyone will follow Bitcoin’s course.
Why do almost all digital currencies move in unison? First of all, there are too many. With around 1,600 virtual currencies to invest in, investors can not keep track of how one crypto currency differs from another. This lack of differentiation makes it difficult for digital currencies to differentiate itself from Bitcoin.
Nor is there any traditional fundamental measures that an investor can use to determine if a crypto currency is fairly valued. While you can look at the profit and loss statements, balance sheets and operating results of listed stocks, all you get in crypto currency is promises in the form of a white paper and maybe the processing speed of the network. Unfortunately, they do not tell investors about the long-term survival of digital currencies.
- Institutional investors come into play
Last but not least, part of the debt could lie with institutional investors, who until recently have mostly been left on the sidelines.
Wall Street has virtually no desire to trade on decentralized crypto exchanges, including the possibility of theft or fraud. It is the retail investors who are responsible for the price movements. These retail investors often do not have the capital to bet on stocks (a process known as short selling that requires money to be borrowed from a broker), which creates an imbalance on the buy side that keeps pursuing the cryptos drifting up.
But as of December, when Bitcoin’s token peaked, the CME Group and CBOE Global Markets both listed Bitcoin futures contracts on their trading platforms. Combining one or five bitcoins (or about $ 6,000 and $ 30,000), these instruments are usually too expensive for retail investors and allow institutional investors to control trading. These institutions and their skepticism probably made Bitcoin pressured and everything else was carried away.
With so many challenges ahead, even lower lows are a real possibility for crypto currencies.