Why are Cryptocurrencies on a Hot Streak?
The story of the blockchain and the digital asset community has classic elements from the best coming-of-age stories. They had an idealistic beginning — bitcoin first emerged in 2008 with the audacity to challenge centuries-old fiat currencies, they underwent obscure ‘finding oneself years’ — digital assets were unheard of between 2008–2014 (when Ethereum entered the market), they overcame challenging obstacles and they rose to prominence.
Today, it seems digital assets, like Bitcoin and Ethereum, are still in a limbo between the last two stages in its ‘coming-of-age’ story; it has overcome many unsettling events in the past few months, namely:
- The Bitcoin Fork
Up until a short time ago, pre-fork Bitcoin was under a shadow of speculation. One of two outcomes were being expected: a) that newly formed bitcoin cash would obliterate Bitcoin or, b) that Bitcoin would be further bolstered as the community would wholly reject bitcoin cash. However, neither outcome materialized as Bitcoin soared 21 percent to $4,300 (since its slump in mid-July). Bitcoin cash, despite its bits and flashes of volatility, has stabilized to a market cap around $6 billion. Bitcoin cash is currently the third largest digital asset, howeveer, it remains to be seen if it will suffer the same fate as another hard-fork by-product, Ethereum Classic.
- The Ethereum Flash Crash
Many speculated that the Ethereum flash crash on June 21st, 2017 was caused by a sizeable “sell” order placed by a whale. 800 stop loss orders later, Ethereum reached a low of $0.10. Many believe that the flippening — an event when Ethereum would overthrow Bitcoin as the leading digital asset — may have halted because of this. However, Ethereum too has rebounded since June and is currently trading at $300. It’s current market cap of ~$28B makes it the second largest digital asset.
- The SEC Ruling
Last month, the SEC decided to categorize cryptocurrencies as an asset class and decreed that subsequent token generating events (TGEs) might have to be registered (if certain conditions were met). Looking outwardly, it might seem that this ruling would have stunted the growth of the digital asset community, many welcomed the regulation and hoped that the blockchain community could claw its way out of the shadows.
Despite all its shortcomings, the digital currency world has rallied to a market cap of $114B (as at August 17, 2017). Its all-time high was $120B a few weeks ago — which was unprecedented for the neo-currency. The question arises, what is the reason behind this rally?
Here are six reasons explaining the price hike:
1. Blockchain Token Generating Events
Many blockchain companies are resorting to TGEs as a means of funding their projects. “Between 2014 and the end of 2016, a total of $295 million was raised” in TGEs.In 2017, the amount raised has already doubled to $1.3B with a quarter of the year left. With an increasing number of TGEs, the demand for ether and bitcoin has gone up, the market forces come into play and prices for the digital currencies also rise.
2. Limited Bitcoin Supply
The bitcoin price spike is caused by a fundamental design of the technology. There is a finite number of bitcoin that can be mined: 21 million (unless there is a design change), and currently only 16.5 million bitcoin is in circulation. Thus, the scarcity of supply pushes up bitcoin’s price as new investors enter the bitcoin market. This phenomenon is also known as the token network effect.
China represents almost 85 percent of the global bitcoin market. Chinese retail and institutional investors are drawn to the decentralized nature of digital assets because of their concerns over the strictly regulated yuan. The Chinese view altcoins as an impressive new asset class that is still unregulated by the Chinese government. Bitcoin is also increasingly accepted as a means of payment throughout mainland China, increasing its functionality in the county.
4. Currency Concerns
Like China, other countries such as Russia and India are also increasing their digital asset investments because of their currencies’ devaluations. Other investors look towards digital assets because they are looking for a stable alternative to the US dollar and other dominant fiat currencies. Brexit has subsequently pushed many out of the GB pound market, with many choosing bitcoin as an alternative.
5. A New Asset Class
Cryptocurrencies are viewed as a new asset class as more and more institutional investors are taking a keen interest in the sector. With dwindling commodity prices, notably gold which is down three percent since 2016 and down 22 percent in the last five year, bitcoin has emerged in prominence.
Japanese and South Korean investments have bolstered the digital asset market because both countries’ governments introduced regulatory frameworks around them. The Japanese government, for example, has recognized bitcoin as legal tender, which has spurred the formation of many bitcoin exchanges in the country bringing in retail investors and elevating bitcoin to a par with the yen.
The Road Ahead
Digital assets still have a choppy road ahead with the SegWit update expected for bitcoin in November. The update is expected to destabilize bitcoin cash and the overall digital asset market cap. Many investors are in active debate about digital assets ’ prospects. Before buying into the pessimistic outlook, read more about digital assets and their prospects.