Is it the end of crypto?
A lot of people are worried about the current state of the cryptocurrency market and wondering if it still has a future. Here are our views on the subject.
Why is it down?
Market FOMO and FUD cycles — or why it cannot go up forever
Financial markets are highly cyclical and crypto does not escape from this pattern. The crypto total market capitalization went from $100 bilions on September 15 to $835 bilions on January 7. This kind of rise is not sustainable and a correction was unavoidable. The cycles are typically driven by two dominant sentiments: FOMO (Fear Of Missing Out) and FUD (Fear, Uncertainty and Doubt). In our latest post written a few days before the start of the crash, we wrote the following:
A lot of newcomers on the market, a lot of fulgurant rises 100% based on hype and a lot of absurd capitalisations for projects with few lines of code. The market really heated too much these last few weeks and the correction will hurts. Hopefully, the core of crypto investors will continue supporting the good projects and a natural selection will occur.
The end of 2017 was characterized by a very high level of FOMO, with a lot of people entering into the market because they did not want to miss the train. The more the prices were going up, the more the media covered the rise, the more people had the sentiment that they had to invest as soon as possible and as much as possible to be part of the new gold rush.
Negative news spreading FUD
After the phase of euphoria of the end of 2017, we entered into a bear market (negative phase of the cycle) driven by FUD sentiments. A vicious circle took place, aggravating progressively the market sentiment: negative news affecting prices, then decrease in price affecting the perception of the investors and increasing their level of FUD, then other negative news having more impacts on price because the level of uncertainty is higher, etc. Here are the most impacting negative news of the last weeks:
Bans
- South Korea ban on anonymous cryptocurrency trading
- Japanese exchange hack resulting in $500 millions stolen
- Facebook banning cryptocurrency ads
Regulation is tightening. This is not new, and while it may affect the prices on the short term because it decreases the immediate demand, it is also very healthy for the long term evolution of the crypto market. Mass adoption requires some level of protection and this is what regulation is for.
Centralized exchanges
- Uncertainty around Tether (token backed by USD) and Bitfinex exchange
- China reinforcing the cryptocurrency trading ban and blocking access to foreign exchanges
Centralization is a point of failure, this is exactly why crypto exists in the first place. Decentralized exchanges are being built fast and their adoption will bring safety and efficiency to the crypto markets.
Will it recover?
To recover, the market needs two things: come back to a positive sentiment and maintain strong fundamentals.
Positive signals to revert the FUD
Some recent positive news may revert the FUD sentiment and help in recovering confidence and hope. Here are a few of them:
“Blockchain technology is an important technological breakthrough to fuel the fourth industrial revolution and as such, the ministry will take a cautious approach in regulating the cryptocurrency market. For negative use cases of cryptocurrencies, the ministry will impose strict regulations.”
And regarding the link between blockchain and cryptocurrency:
“For open-source blockchain networks, cryptocurrencies are necessary as incentives for individuals to participate in the network.”
- US Senate Banking Committee hearing about virtual currencies: the conversations were very interesting, showing a desire to understand better the subject, with an apparent willingness to regulate the market while allowing it to grow. It can be summarized by this declaration of CFTC Chairman J. Christopher Giancarlo:
“We owe it this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one.”
- The investment app Robinhood will allow crypto investing. It is called Robinhood Crypto, and more than 1 million people have already signed up.
- Billionaire and former Wall Street fund trader Mike Novogratz has reportedly raised $250 million for a cryptocurrency investment venture dubbed Galaxy Digital. The CEO of Foxconn is one of the investors.
Fundamentals remain strong
The crypto ecosystem is still growing exponentially: experiments on technology, decentralized applications projects, new tools and exploration of possible use cases continue to be announced every day.
The main platforms are evolving:
- Bitcoin: SegWit adoption growing, Lightning Network live and being tested, RSK beta version released. Bitcoin 2.0 is coming?
- Ethereum: transition to Proof Of Stake initiated with Casper, Plasma development in full mode with OmiseGO project. Always more developers, tools and projects built on top of Ethereum. The backbone of the crypto ecosystem it growing in scalability and solidity at a steady pace.
Conclusion
No, this is not the end of crypto. This is a bear phase of the cycle and it will, sooner or later, recover and reach new highs.
Crypto is the first Global Market of history, operating 24/7 with practically no barriers to entry. All the typical behavioral biases and emotions-driven decisions already observed on the classical financial markets are exacerbated on the crypto market, creating these extreme up-and-down cycles. The most important is to stay focused on what will make a difference on the long term: which projects are building the foundations of the decentralized economy? which ones have the highest probability of success? which applications will first gain mass adoption?
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Disclaimer: This article references an opinion and is for information purpose only. It is not intended to be financial advice. Do your own research before making any investment decisions.
