The Crypto market crashed by more than 60% in just five months (since July), with a total market capitalization down to USD 184 billion, according to Coin Marketcap. Bitcoin has lost more than half its value since December 2017, Ethereum is down by 78% in that period, and Litecoin has fallen by 86%. The market cap of cryptocurrencies is about ten times less than the peak value in January 2018.
Many people just lost their investments which does not help the market valuation or new investors and supporters. More than 1 billion USD was lost by ICOs and token sale participants. Many cryptos projects (Binance included) announced plans to start charging fees on all transactions, whether withdrawals or deposits, which might reduce the number of trades and potentially cause further market decline.
Bitcoin and Ethereum are quickly losing their positions. Bitcoin dominance fell to a new low level of below 36%, while more than 1300 different cryptocurrencies were on the top 1000 list in January 2018. The market is very volatile, and investors have to be very cautious about what asset to invest in – only those with the highest risks will give higher dividends, they also might lose everything if something goes wrong.
Why are cryptocurrencies crashing?
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The main reason behind the current bear market is linked to the ICO (Initial Coin Offering) excites. Many projects with an unclear business case and shaky have raised substantial amounts of money through ICOs, a, number of them have even more money than they need – they exceeded their soft cap (which means that they had enough funds) by 1000%, i.e. by 100 times more than required.
Many projects that have raised money through ICOs have been created on a very shaky foundation. Some of them may work at all and can become real businesses, but even the most successful projects need to be analyzed very carefully before investing. It’s essential to know who is behind the project because this will help determine whether it is a real business backed by a good volume of partners or just an empty shell pumped with billions of dollars.
Many ICOs have raised money by promising unrealistic returns in the short-term (for example, immense daily growth or 10–100 times of investments within a year), and many have raised money by making very extreme promises that can’t be deliver in short time scales (for example, a project will raise USD 1 billion within three years). The last kind of project either raise money by making such solid promises and then go into hibernation and wait until they get more funding or “realizes” that their project will never work.
Will cryptocurrencies rise again?
The outlook is not very bright yet. The biggest problem when dealing with cryptocurrencies is that it’s very tough to evaluate projects and their actual business case, because of the lack of traditional metrics (like net profit). The strong growth or stagnation in price has been used to determine the health of cryptocurrency markets, but this way of measuring efficiency does not apply to all assets.
Some cryptocurrencies may grow again, but it’s not very likely. And when cryptocurrencies rise again, it will be more likely to happen on a long-term scale and not just in one or two months. Because of the lack of control, it’s hard to say which currency will rise within a year or two. But we can eliminate some currencies as non-candidates for the next big thing: for example, coins with weak fundamentals and team (like OmiseGo) or dull coins that don’t have any potential to be used in everyday life (like Ripple).
Interest rate hike
The Federal Reserve has raised interest rates for the first time in a decade. The United States Federal Reserve Board has started to raise interest rates for the first time in a decade. This will be two more hikes this year and three more in 2019. It is expected that the interest rate on loans will go up by another half per cent (to 2–3%) by the end of 2019.
There is a vague feeling among the public that cryptocurrencies are not worth as much as they used to be. This happens because most of the cryptocurrencies out there are highly speculative and risky currencies, so it’s often difficult to predict how they will perform in the future. This takes away from many people’s confidence and faith in the cryptocurrency market.
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Several countries have already announced future code on cryptocurrencies. China is the first country to implement heavy-handed regulatory measures. Many other countries are looking into bitcoin and other cryptocurrencies and their regulation.
China has prohibited cryptocurrency trading in its exchanges, and China’s government has banned all bitcoin exchanges in China. In addition, the Chinese authorities announced a “hard ban” on initial coin offerings (ICO) and initial coin offerings have since been closed down by the government.
In South Korea, the government has said that it will issue state-issued cryptocurrency next year. In the UK and Germany, many companies are looking into blockchain technology and are interested in cryptocurrencies. The US SEC has announced in September 2017 that they would be looking into initial coin offerings (ICOs) and companies involved with them. The SEC is investigating a couple of ICOs, including one company called PlexCorps, as they believe they may have been engaged in an illegal security offering.
Also, Singapore is going to be regulated to see how they can benefit from the ICOs and how they can stabilize cryptocurrency. Since the Bitcoin white paper was published on October 31, 2008, dozens of cryptocurrencies have come to market. Many are actively trade on exchanges with the bitcoin core (BTC) as the base currency.
Bitcoin in Oversold Zone
In late December 2017, Bitcoin’s price went into a complete bearish cycle that saw prices fall continuously for nearly two months. The market capitalization of the flagship cryptocurrency fell from $161.2 billion to $120 billion in just over six weeks, a loss of around 30%. At the beginning of 2018, Bitcoin was trading around $20,000 before things began to reverse on January 3, and the network officially entered its bull phase.
The bull market has not been without its issues since the beginning of the period. On February 7, for example, the crypto market experienced a two-hour delay in price as the BTC Network went into an oversold zone. The term was first coined by famous cryptocurrency technical analyst Murad Mahmudov on his Twitter account to describe a situation where the market is unfaze extreme sell-side pressure.
Lack of liquidity in cryptocurrency markets
Cryptocurrency markets have always been highly volatile, and leveraged trading has been responsible for most of the volatility.
Bitcoin’s volatility is measured by known factors that include market capitalization, trading volume, and spread. The spread is the difference between a buy and sells price for Bitcoin on different exchanges. Although Bitcoin’s trading volume has steadily increased in recent years, liquidity remains an issue as it shows how fast cryptocurrencies are traded.
The mainstream adoption of cryptocurrencies has been a significant factor in their price over the years. Bitcoin began trading in 2010, and since then, it has seen periods of extreme volatility. This can be attributed to high volatility which led many investors. To stay away from the market for a few years. Bitcoin’s price plummeted after China banned cryptocurrencies and ICOs. The ban on ICOs also led investors to stay away from the cryptocurrency markets until further developments were made by intermediaries.
Crypto security breaches causing fear
Financial institutions have become increasingly wary of the growing popularity of cryptocurrencies. In January 2018, The National Bank of Abu Dhabi announced that it is exploring the creation of a regulatory sandbox for cryptocurrency and blockchain startups. In Italy, financial regulators are looking at ways to regulate crypto-related activities. There are also rumours that Russia will regulate cryptocurrencies by the Russian Finance Ministry’s proposals in May 2017.
Cryptocurrencies were created to be used as a medium of exchange but there are many instances where they have been abused such as ransomware and fraudulent fundraising.
Crypto influencers causing volatility
There have been instances where “crypto influencers” have caused colossal volatility. Crypto influencer is a term used to describe several people who share their thoughts about cryptocurrencies on the internet to attract more followers and gain more reputation.
There are three key factors contributing to the high volatility of cryptocurrencies, namely The Exchange Factor, Market Depth, and Network Effect. The volatility of cryptocurrencies is a direct result of the lack of supportive market depth. An increasing market capitalization makes the cryptocurrency highly volatile. A high market capitalization also means that there is less liquidity available which makes it difficult to sell large amounts without affecting the price too much.
Cryptocurrency correlations with the stock market
The stock market is a highly liquid and mature market that has been around for more than a century. Currently, Bitcoin’s market capitalization as of July 2018 is $190 billion, while the stock market is worth approximately $80 trillion. Crypto investments are still in the early stages of development where they cannot compete with the more mature financial instruments yet.
Supply & Demand
The supply of cryptocurrencies is limited, with only 21 million bitcoins available for mining. As we have seen in the past, Bitcoin halving has resulted in miners leaving the market. With no new coins being added to the market, this has resulted in a dramatic drop in its price from its peak of USD 20,000 per bitcoin in December 2017 down to USD 8,500 per bitcoin.
There is limited demand for cryptocurrencies because they are not widely accepted as currency. The more people use cryptocurrencies for transactions, the more valuable they become.
Inflation deflating the economy
Inflation is widely regarded as one of the major problems facing many economies around the world. This is to be expected as the inflation rate is directly correlated with the economy which allows for a direct comparison of fiat-based currencies such as dollars, euros, yen, and others. A high inflation rate can be seen as a sign that the economy is unstable and ultimately leads to financial instability.
Inflation in many countries is generally caused by prices rising because of excessive demand for goods and services which forces supply to shrink proportionally.
Ukraine and Russia Crisis
The Ukraine-Russia crisis was one of the most significant events in the cryptocurrency markets in recent memory. The war took place between pro-Russian separatists and Ukrainian government troops. This led to a massive influx of capital into Bitcoin and other cryptocurrencies as investors began to look for ways to hedge against a weakening U.S. dollar.
In November 2017, Bitcoin reached a new high of $10,000 after the value had been rising steadily for several months throughout the year. This was fueled by the Ukraine-Russia crisis and bullish attitude toward bitcoin.
Institutional interest cooling
For various reasons, the interest and involvement of institutions have been declining in the cryptocurrency markets. Institutional investors are essential to the market as they add significant liquidity to a market that is often considered illiquid. Institutions are known for having high capital which allows them to conduct high-frequency and large-size trades, this is not possible in the crypto markets, especially with their limited trading volume.
In addition to this, institutional investors generally have mature processes and systems which are not compatible with cryptocurrencies which are still in the early stages of development. This is a significant issue as it makes it difficult for institutional investors to participate in these markets resulting in a reduction in their presence.
Seeking safer ground
This is why investors and traders are flocking to stable coins. A cryptocurrency that typically has no volatility, tether (USDT) is often considered to be the safest cryptocurrency in the market. This because it’s pegged to the U.S dollar which makes it exceptionally stable. The USD Tether currency has a fixed value, which means that if you own a tether coin, you’re effectively holding the equivalent value of one U.S dollar in your wallet.
It’s important to note that there have been several controversies surrounding tether, with some suggesting that there’s not enough proof that USDT is backed by a U.S dollar. This leads us to wonder why traders are interested in this cryptocurrency when there are so many other options available.
Bull Bear cycles
Regarding cryptocurrencies, several terms are important to be familiar with. One of the most essential concepts is the Bull Bear Cycle, which refers to a trend that has existed in the markets for decades and is common in every need, including commodities, stock market, and cryptocurrencies.
The direction of this cycle is determined by whether prices are rising or falling. The longer the time frame used when charting this cycle, the more accurate you can be when predicting where costs will end up. This is a period where the value of an asset is on the rise. This characterized by optimism, rising prices, and a general sense of positivity. This has been seen in cryptocurrencies as people have grown increasingly optimistic about their future potential the general feeling that they can’t fall much further has driven the cryptocurrency markets higher.
But once the bear market begins to set in, traders move their investments lower as the market becomes increasingly concerned about losing value. This is typically referred to as a downward trend, generally accompanied by slowing growth and declining prices.
Article proofread & published by Gauri Malhotra.