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What caused the Cryptocurrencies to crash?

 

Cryptocurrencies have dropped a long way since late 2017 and early 2018. The so-called “alt-coin” market is sitting at a yearly low of $US187 billion. While that sounds like a lot of value, this amounts to a total of $US642b that has disappeared since its all-time high of $US829.96b in January this year.

Almost all cryptocurrencies – Bitcoin, Ethereum, Litecoin, Ripple – are shedding billions in value from their market cap. Ethereum, one of the best-performing versions during last year’s boom, fell 8% yesterday to a low of $US170.34, bringing its total loss since January to roughly 90%. Ether typically rises and falls alongside its larger, better-known predecessor bitcoin. But that trend is changing. Despite the volatility, bitcoin's value in 30 days has risen by 0.1%. Ethereum has fallen 45% in the same time period. Last week Bitcoin prices dropped more than 20% in two days after Business Insider reported investment banking giant Goldman Sachs was dropping its plans to launch a cryptocurrency trading desk. The company’s chief financial officer then clarified that it hadn’t made a firm decision but still the damage was done. Bitcoin prices, which were hovering near a record high of about $US20,000 in December, have lost more than two-thirds of their value since then and are presently trading near $US6300.

University of Auckland associate commercial law professor Alex Sims says the latest catalyst for the dip in value was the Goldman Sachs “fake news.” “That sent the markets down. And the thing is, whenever something happens with bitcoin, everything else is in lockstep and also falls. “In some ways, I think in the long run, it’s good for this to happen. At the end of last year, it was just insane with all those people piling in. And quite frankly, people did deserve to lose money because it was rampant and crazy speculation.” alex sims University of Auckland associate commercial law professor Alex Sims says some of the problem is "fake news."

BlockchainLabs.NZ director Mark Pascall says the “crypto markets” are notoriously volatile in comparison to traditional asset classes and currencies. This volatility is mostly driven by speculation and is often significantly affected by media headlines. “The stories that have had the most effect recently seem to be centred on what regulators and the traditional institutions such as Goldman Sachs are talking about doing. “Another likely effect causing downward pressure during 2018 is the huge influx of investment into cryptocurrency in 2017 and early 2018 to fund the development of new blockchain projects. Many of these new companies have partially liquidated into dollars to mitigate risk and pay employees, causing overall prices to drop,” Mr Pascall says. Dr Sims says many investors still want cryptocurrencies as part of their divestment strategies. But many institutional investors won’t put their money into the digital money until it’s properly regulated. “A lot of people are also concerned about a wider share market crash, so they are likely looking for a bit of a safe haven,”

Hamilton Hindin Greene investment adviser Jeremy Sullivan says the recent carving of value is a “shake-out” as the hype dies down and regulators begin to look closely at cryptocurrencies. “It’s very similar to what you saw in the tech boom in the early 2000s where everyone rushes in and gets gold mining fever. Now, regulation from the US Securities and Exchange Commission (SEC) suggests that cryptocurrencies can be regulated under the same financial legislation other securities are regulated under. “They’re trying to figure out if exchange-traded notes (ETN) are a way in which people can get access to this new investment through traditional markets. This is proving difficult to get past the current legislation,” he says. Mr Sullivan believes despite the downturn cryptocurrencies are “here to stay” but to say which of the many versions will survive the regulation is harder to predict. “Some of them will make it through this regulatory hurdle and come out the other side with better identification of the buyers and sellers. “So, while it is unregulated now, it is still the Wild West and, for the whole system to survive, it must come under legislation to make sure it isn’t facilitating money laundering and financing terrorism.

The unregulated nature of cryptocurrency is not a long-term model.” bitcoin Bitcoin's market value has dropped considerably since the start of the year. Of all the cryptocurrencies, Mr Sullivan says, Bitcoin is the most well-known and in many ways has become a shorthand for the digital money in the same way Google has become a shorthand for search engines. “It is the most widely known of the cryptocurrency. But the ones that will thrive will be the one that embraces regulation, so I would keep an eye on that space. “And besides all this, the applications of blockchain remain vast which means there are plenty of people working on ways to deliver that technology outside of money as well,” Mr Sullivan says.

Hussein Sayed, the chief market strategist at currency brokerage FXTM, said in a report this week that it's possible Bitcoin prices could fall below $US5000. Adding to this sentiment, Mohamad El-Erian, chief economic adviser at Europe-based Allianz, says Bitcoin should have a buy value of about $US5000 and reiterated the analysis that last year’s sky-high prices were due primarily to an unwarranted buying frenzy. “What we’re getting is the realisation that adoption is not going to be as big and as quick as the proponents of crypto would like. I think it’s going to be there, it’s going to last for a long time, it’s going to play a role in the ecosystem but it’s not going to be the currency that a lot of proponents would like it to be,” he told reporters. But some, like London Fintech Week founder Luis Carranza, say Bitcoin could find a price bottom of $US2500 this year. Others, such as American economist Nouriel Roubini, say the price for Bitcoins will drop “all the way to zero.”

Founder of NZ-based Brave New Coin Fran Strajnar told NBR he suspects the deep slice into cryptocurrency value is part of what research firm Gartner calls a “hype cycle.” “We went from bitcoin being $US200 to $20,000 in a short, two-year period. The inevitable redistribution has occurred over the last nine months since that peak. “Either we are at the bottom or near the bottom for Bitcoin because we already see signs of stabilisation in the $US5700-000 range. But Bitcoin today is still about 10x the price of 18 months ago, to give this some perspective.” Wind in blockchain’s sail However, Mr Strajnar says other digital currencies are experiencing a reckoning “as they should.” Last year introduced “too many bad ideas,” which received disproportionate funding through what is called initial coin offerings (ICOs) – a process roughly equivalent to an IPO in the mainstream investing world. “This has dragged down good projects as the entire altcoin market goes through a dotcom-style capitulation, representing some undervalued projects and buying opportunities now and in the near future. “We expect lots of news about poorly conceived and managed projects running out of funding, along with plenty of M&A activity shortly. We also expect security tokens (digitising share certificates) to be a big deal by the second quarter of next year and the entire crypto market to go through another bull market in 2020 when bitcoin supply reduces again,” Mr Strajnar says. 

Mr Pascall says this recent collapse in prices should “take the wind out of the blockchain sail” although the ongoing investment and innovation in the development of new blockchain-based systems suggest this hasn’t happened yet. “One tangible measure is the number and scale of conferences occurring all over the world. Two of these are happening in New Zealand in October," he says. Some of the leading minds in blockchain are descending upon Millbrook resort in Queenstown in a couple of weeks to discuss security tokens, capital markets, regulation, identity and many other things at a conference called Blockchain South. Brave New Coin’s Mr Strajnar says the “fundamentals continue to be very strong” for Bitcoin in particular as hash rates, user numbers, transaction numbers and value all continue to be stable or grow despite market prices. “We will likely hear about various scaling solutions from a number of blockchains as they come ‘out of the lab and into the wild’ over the next nine months, starting to disrupt large, real-world vertical,” he says. “And as blockchain proves to scale technologically, the real fireworks begin.”

 

Filed under Jeremy Sullivan \ NBR

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