Speculators claim that this is a temporary crash but market analysts argue that it may be all over for Bitcoin and other cryptocurrencies. Should we continue to follow the hype or finally begin to exercise caution?
After the massive surge in crypto prices this past year, we seem to finally have come across a major crash. Bitcoin, in particular, garnered immense global attention as it reached prices of nearly $20,000 per coin. Despite these gains, the price of Bitcoin dipped below $8,000 and some analysts estimate that it could decrease further in the coming days. This dismal trend for Bitcoin along with the significantly lower prices for Ripple, Litecoin, and nearly all other major coins seem to be justifying the notion that this entire crypto market was a bubble from the very start. However, it may well be far too soon to worry.
Every movement in any financial market, especially one as volatile as the crypto market, needs to be contextualized. Cryptos have outperformed essentially every other asset class this past year with a number of coins rising by over 5,000%. For comparison purposes, the top performing stock on the S&P 500 (Align Technology) rose by only 132%. The market cap of cryptos as a whole reached an all-time high of over $830 Billion at the beginning of this year, surpassing the market cap of Amazon at the time. So, it can be certainly be argued by some that a price correction only seems logical after such a meteoric rise.
It is also crucial to understand the major events that contributed to the massive downturn. There was first the potential scare that countries such as Korea and India may be soon be banning cryptos altogether. These two events had particularly large effects since many investors operating in these nations initiated a large sell-off in order to capture their gains before their coins were permanently banned. Although these stories were later found to be unsubstantiated or at the very least overexaggerated, the market never fully recovered to previous levels. In addition, Facebook decided to ban all crypto ads and $532 Million was stolen from one of the most popular Japanese crypto exchanges by hackers (possibly the largest theft in history). There were also numerous scams abound in the space, which exacerbated matters further, with one particularly notorious platform called BitConnect shutting down all functions and leading to millions in losses for its investors.
Regardless of the specific price points of each coin, one question we should all be concerned with is what this hype around decentralized currencies entails for blockchain technology. One position is that the entire space is a speculative bubble that was destined to crash. Certainly, there have been recent events that are eerily reminiscent of the Dotcom bubble in the 90s during which time simply adding the phrase .com to the end of a domain name seemed to exponentially increase a company's monetary value. Take for example that when Long Island Iced Tea simply changed its name to Long Blockchain, its shares increased by nearly 500%.
Now let's supposed that these crypto critics are indeed correct and the market is, in fact, a bubble that ends up crashing. However, what often goes overlooked when painting the crypto industry as a "bubble" is that a crash does not entail the end of all blockchain technology. For instance the tech bubble led to the demise of many prominent companies at the turn of the century; however, a number of companies, such as Amazon, Priceline, and eBay, recovered and even surpassed their pre-crash all-time highs. So, while a crypto market crash could lead to the end of many current protocols, the best technologies, in my opinion, will recover, innovate and could potentially experience mainstream adoption in the near future.
On the other hand, if we have learned anything about cryptos so far is that a supposed crash is never truly permanent. Many claimed that Bitcoin was finished when it crashed from $17 to $2 only a few years ago. Then, in 2013 Bitcoin surpassed the $1,000 mark for the first time and fell back to a few hundred dollars in a matter of days. In 2017 alone Bitcoin has crashed by 30% or more on numerous occasions, but each crash was subsequently followed by gains of anywhere from 76 to 152%. So, the current "crash" we are observing right now could merely be temporal in nature. However, one question we must grapple with is whether we will continue to remain focused on the prices of these coins or finally shift our attention to the applications of blockchain technology and the potential innovation it can bring to our society.
What do you think? Let me know in the comments below!
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Mirza is the Co-Founder and CEO of ChainView Capital, an investment firm focused on crypto assets. Previously, he was an investor at Two Sigma, one of the largest hedge funds in the world. In addition, he has worked at Citigroup, BCG and Index Ventures. In his free time, he loves to travel and also remains heavily involved with a number of nonprofits both here in the US and abroad. Mirza studied Government at Harvard University.