Tech-savvy investors have kept their eyes on cryptocurrencies like Bitcoin for several years now. The most prolific form of cryptocurrency has brought backers on a rollercoaster of highs and lows over the past two years. While this culminated with an all-time high of more than $19,000 in 2017, Bitcoin, in particular, would go on to lose almost 70 percent of its value just several months later. And as we saw in the altcoin universe, some losses clocked in at over 95%.
But what exactly caused the recent crypto crash of 2018? Even more importantly, what does the future hold for the various other types of cryptocurrency? Below is a rundown of some of the common themes that precipitated the 2018 selloff.
A Limited Supply Increases Demand
In its purest form, Bitcoin and its competitors are all a form of currency. But the format differs so much from traditional forms of money — like the Dollar or the Euro — that people trade cryptocurrencies as if they were commodities. The limited supply of cryptocurrencies, coupled with increased consumer demand, is bound to inflate the price. But such inflated value can only last for so long.
Crypto Challenges Cause Consumer Hesitation
Bitcoin and other cryptocurrencies are fighting an uphill battle. Not only do they face increasing government scrutiny, standardization and regulation, but they’ve also gained a lot of unfavorable press in the past months and years.
In South Korea, three executives of an exchange called Upbit got charged for making fraudulent transactions that allegedly occurred between September and December 2017. Moreover, there are allegations that those executives sold 11,500 BTC to individuals during rigged transactions that solely benefitted the executives. That’s just one example of recent cryptocurrency corruption.
Plus, people who invest in cryptocurrencies rightfully wonder how secure their funds are. A report indicates that the total amount of cryptocurrency stolen in 2018 will likely reach $1 billion, with the thefts often resulting after hacks happen at the platform layer level or when cybercriminals infiltrate exchanges. When people hear about those headline-capturing events, it’s not surprising if they fear being the next victims.
There was also a widespread belief that cryptocurrencies like Bitcoin were untraceable and that it was impossible to connect transactions back to specific users. However, that claim has been debunked, since there are numerous ways to violate the supposed inviolable privacy cryptocurrency offers and link transactions to the people who performed them.
Between fraudulent transactions, stolen funds, and online privacy concerns in general, many consumers are hesitant to embrace these new platforms. When they balked due to the unsettling events described above and others like them, the hesitation partially caused the crypto crash.
The Effect of SEC Regulation Fears
Potential cryptocurrency investors are also hesitating due to proposed Securities and Exchange Commission (SEC) regulations. They recently considered adding strict control to govern the trade of Ethereum — which caused a lot of concern over the likelihood of even tighter rules and regulations in the future.
Fortunately, the SEC ruled Ethereum is not the same as corporate bonds or stocks. Instead, it’s more akin to commodities like gold and silver. While this has eased some investor concerns, the lack of stability in the cryptocurrency market is still a significant concern.
A Recent Panic Triggered by the Bitcoin Cash Hard Fork and Resulting Drama
Analysts have also weighed in to state how they believe the Bitcoin Cash hard fork, which happened on August 1, 2017, set the stage for the 2018 crash by causing bickering between the two crypto communities associated with Bitcoin and Bitcoin Cash. The hard fork caused an initial drop in Bitcoin’s value, partially driven by the negativity surrounding the event. A technical selloff occurred after the fork, followed by full-blown capitulation after that.
The technical selloff and capitulation have defined many of the discussions about Bitcoin’s crash, especially over the past six weeks or so.
Even long-term holders of Bitcoin have started to decide it’s time to sell. Bitcoin’s price dropped 36 percent in November 2018 alone. However, some people are still confident that the cryptocurrency will bounce back — as it has before, after other substantial drops.
Is the Bubble Bursting?
Opponents of cryptocurrency suggest the bubble has already burst. They compare the current situation to the “dot-com” bubble of the late ’90s and early 2000s, which bankrupted countless IT entrepreneurs. But experts in the field disagree. According to Angel Versetti, CEO of Ambrosus, the cryptocurrency bubble hasn’t even begun.
Matthew Newton, a top analyst with the online investment platform eToro, suggests it’s far too early to determine whether there is a bubble and if it has already burst. But he was also quick to point out the formation of a cryptocurrency bubble is an inevitable step in the processes of evolution and maturation.
Where Do We Go From Here?
There isn’t a failsafe method for keeping cryptocurrency alive. Instead, it will take a concentrated effort from investors, consumers and retailers alike. Not long ago, the value of Bitcoin was struggling to top $1, so it’s still come a long way in a short time. Additionally, there have been some key developments — despite the recent setbacks — that show great potential for the future.
The big challenge for investors moving forward is navigating between the short-term risks and long-term potential of digital assets. The apparent bursting of the asset bubble in 2018 exposed an overbought market that had risen too frantically for the fundamentals to support. But the pullback hasn’t weakened the value proposition of Bitcoin or other leading cryptocurrencies. As we’ll see over the next six months, topics ranging from institutional adoption to business innovation will dominate the headlines as the market continues its evolution.