2017 was the pivotal year for the cryptocurrency market as from a closed community of a bunch of tech geeks and a few speculators, cryptocurrencies made their foray into the mainstream financial markets. To get more perspective, at the beginning of 2017, the total market cap was around $20bn then and it was well over $700bn by the end of December 2017. That’s a staggering 35 times within a year! Suddenly the mainstream media started caring a lot about bitcoin, cryptocurrencies and the blockchain. It wasn’t for the technological advancements that grabbed the media attention, it was the parabolic ascend of prices in dollar terms.
What goes up, comes down!
All the financial markets are subjected to cycles: optimism/hope, confidence, thrill, euphoria, complacency, fear, denial, disbelief, capitulation, and repeat. And the cryptocurrency market is not an exception to these cycles. Just that things happen way too quickly in this market. At the beginning of 2017, we may have just started the cycle and now what we are seeing in July 2018, might be the capitulation stage. During the price surge in 2017, post facto analysis says, markets wanted the technology to do things it was not ready for. When the reality check happened, prices came crashing down. No market pundit can pinpoint the exact reason of this colossal fall. The markets are complex; multiple forces act at a given time and it is difficult to gauge what caused what.
At this juncture, it is sensible to look at multiple aspects that could have caused this damage -
Prices more than value, retail psychology, and FOMO
A large chunk of retail investor looked at crypto as a ‘get rich quick’ scheme. They felt that this asset class will only move upward and the euphoria kicked in. Everyone wanted a piece of the cryptocurrency market. Investors started throwing money into anything that said decentralized, blockchain etc. Sensible investors would have seen that the rise in prices was not in sync with the advancements in the technology and the collapse was imminent.
Cryptocurrencies are different from conventional currencies and having ‘no centralized governing body’ can get them in trouble with the governments. Regulatory uncertainty is one of the biggest reasons for institutional investors to watch cryptocurrency markets from a distance rather than participating. Though, since December 2017, we saw regulatory crackdown from around the globe, a lot of governments, now, are speaking the language of governing and not banning. This is reassuring for a lot of stakeholders, especially the institutional investors. Once this dust settles, we might see more fiat coming in via the institutions around the world.
As there is no regulation around ICOs, a lot of them acted irresponsibly and scammed their investors. There have been so many cases of funds being stolen, whether from exchanges or MEW (because of phishing sites). This has exposed the vulnerability of the technology out in the open. Technologically, blockchain, cryptocurrencies, wallets are complex by nature and not a lot of people understand how things work. As long as the bar for security is not raised, it will be difficult to attract the next herd of investors. Among other things, theft and frauds are two of the major reasons regulators are not ‘for’ crypto.
The launch of Bitcoin Futures
Though the launch of futures gives a clarity on regulations and is regarded as a positive move for the crypto markets, it also allows institutions to bet on the opposite direction. This has changed the market dynamics to a great extent.
Although nothing concrete can be said, there are theories of manipulations in crypto markets. There are a few people who own a significant amount of bitcoins to influence the markets. This theory says that these ‘whales’ started selling their bitcoins after the prices skyrocketed in December 2017.
The road ahead
In terms of technology adoption, we are still in the early majority. Some experts say that we are in the chasm phase where the impact of technology is overrated. As more and more use cases are built and technology becomes more robust, we will get out of this chasm and make way for the adoption at an even bigger scale.
Experts across the world are in the business of predicting prices. Tom Lee, co-founder of Fundstrat, predicts the bitcoin price to be $22,000 by the end of 2018. Arthur Hayes, co-founder of BitMEX, predicts that a green signal to bitcoin ETF could propel the price to $50,000 a piece by the end of the year.
It’s difficult to predict time and price accurately in any market. However, according to a lot of market pundits, the selling pressure is reducing and bears are losing their grip. The long drawn bear market of about more than 6 months has pushed the impatient investors out of the market. There has been a plethora of good news in the market which has not resulted in the price rise (just the way any bad news was rejected during the rise). This will act as the fuel to boost prices when the sentiment turns positive. And what went down, shall go up!
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