For the second time in less than a month, the number sat atop the front page of reddit. The situation was different, but the root cause was the same. Cryptocurrency. That the number is the number of the US National Suicide Prevention Lifeline should tell you all you need to know about the stakes that have risen in this market. If Bitcoin’s rise was spectacular, its fall has matched it. Down more than 60% from its all-time high, its death knell is being wrung by all the respectable figures in finance. One felt for all the unfortunate souls who had brought at the top.
If Bitcoins rise was spectacular, its fall has matched it
I am of course referring to the great crash of 2014. Now it is 2018, and those people who foolishly bought at the top in 2014 are sitting at eight times their investment. That is not to make light of the recent crash, which has been seismic. To put it into perspective, the 2014 crash was caused by the collapse of Mt Gox, a ludicrously named Bitcoin exchange that was handling 70% of all Bitcoin transactions. Today people are still searching for what wiped about $450,000,000,000 off the market cap of the cryptocurrency markets, and the uncertainty is doing it no good.
the uncertainty is doing it no good
A talking point by those still bullish about the Bitcoin market is that there are routinely crashes in January, not just in 2014 and 2018. Notably, Bitcoin crashed in January 2017 from a high of $1162 to a low of $752, and this prefaced the meteoric rise. Theoretically therefore, this crash could be followed by another huge increase. Software expert John McAfee, who predicted 2017’s price rise, has already predicted a Bitcoin price of $100,000 by the end of 2018. This annual ritual of a January/ February slump followed by a meteoric price rise is sometimes attributed to Chinese New Year, a period in which Chinese investors in cryptocurrency withdraw from the market to buy presents for their relatives- a phenomena known as ‘Lunar New Year’. By this theory, the price of Bitcoin ought to rise after Chinese New Year (which in 2018 is February 16th to March 2nd).
However, the crash of 2018 had been much more significant than previous January crashes, and cannot be attributed to the small number of Chinese investors withdrawing money to buy presents. The cause of the crash is more likely to be similar to the causes of previous crashes in September 2017, namely moves by various governments and banks to curtail exchanges. On Tuesday 6th February the Head of the Security and Exchange Commission asked Congress to pass new regulations on the currency. This regulatory uncertainty is causing many to leave the market while they still can easily. Additionally, many financial firms such as Virgin Money, Bank of America, JP Morgan, Citigroup and Lloyds have banned purchase of Bitcoins with their cards.
the crash of 2018 had been much more significant than previous January crashes
Yet on the 6th February, the United States CFTC (Commodities Futures Trading Commission) convened a session to discuss the rise of the crypto market and was surprisingly positive. The Head of the Commission stated the Commission’s willingness to nurture the emerging market. Virginia Senator Mark Warner even claimed that the market could reach 20 trillion dollars by 2020, a prediction too bold for even John ‘bath salts’ McAfee.
Many in the cryptocurrency scene are actively plotting an overhaul of ‘the king’, citing its outdated tech and scaling problems. The most obvious candidate to take bitcoins crown is Ethereum, essentially a customisable Bitcoin, which came very close the dethroning it in June 2017 (an event prematurely dubbed ‘the flippening’). Other pretenders circle. Ripple has attempted to ally itself with the banking industry to mixed effects, while Bitcoin Cash has long been parading itself as ‘the true Bitcoin’. However, none have yet been able to eat into Bitcoin’s price without crashing the rest of the market, so for now an uneasy truce persists.
Once one ventures outside the top ten though, the market quality takes a nosedive. The sad fact remains though that about 95% of all the coins on offer are total rubbish. Many are outright scams (look up ‘Bitconnect guy’ if this piece is too serious for you). Cryptocurrencies in general, owing to their decentralised nature and the technical inexperience of many investors, are ripe for scams, Ponzi schemes and worse, and, despite the government regulations, there is little that can be done to prevent people losing money on get rich quick scams. Standard investment rules apply- if the returns promised are too good to be true, they probably are. More concerning still is the situation with Tether – a dollar-backed crypto which many accuse of not having the cash reserves its $2,000,000,000 market cap requires. A recent subpoena against it has done nothing to calm those fears, and at this point the currency seems a ticking time bomb.
So the question remains, why invest at all? For those who bought and held through previous dips, there is one clear resolution. The future of cryptocurrencies is bright, both as an alternative to fiat currencies and as a technology that will make transactions easier. To those that believe this, this has not been a crash. It has been an opportunity.