When it comes to cryptocurrency, or any kind of large marketplace, asking “why” can be a doorway into a lot of biased guesswork at best, and dangerous delusion at worst. If anyone knew exactly why the market was down, they’d also be able to know exactly what conditions could change that, and that kind of information would be the direct source of a lot of wealth.
Some will claim they can see the patterns behind the movements, with the evidence of their expertise being that they’ve made money on their analysis. But we should be careful of the spotlight bias. Some percentage of people will succeed in any market shift, and with the benefit of hindsight, they’ll look back and proclaim it’s because of what they knew all along. We tend to give those people attention, and forget about the rest, even though they all sounded equally reasonable back before the results were known.
That said, the marketplace isn’t quite as random as rolling dice—there are influences that give a context for how prices have risen and fallen. Though no one can say with certainty exactly which effects led directly to which results, there is some sense in considering environment in which the crypto markets exist. Here we’ll look at some of the factors that might have contributed to the down market experienced so far in 2018.
The Current Market is Correct
Saying the markets are “down” is relative. Down from what? From what it was, or what it “should” be? And if it’s down from where it “should” be, what is the correct price?
Many believe crypto should be up from where it is because they both believe in its future and they bought in with the hopes of riding a wave toward that future. The universe doesn’t care about your plans, though. Believing that crypto should be worth enough for you to buy a Lamborghini isn’t really an analysis of any kind.
Is the market really down? Yes, prices are way down from the crazy highs of December 2017. But, for the most part, they are still higher than they were one year ago.
Consider Bitcoin, which, for better or worse, correlates strongly with the prices of other coins, and can be used as a general indicator of market trends. In December of 2017, Bitcoin reached a high of US$19,535, and as of July 2018, it’s around US$7,000. With a drop in price of over US$12,000, that’s definitely cause for some alarm. If you had jumped into the world of crypto in December, then you might feel that promises held out to you about the future of blockchains were a bitter disappointment.
Looked at another way, though, in July of 2017, exactly one year ago from the time of writing, Bitcoin was US$2,800, meaning it has more than doubled in price in 1 year, which is a very good investment by any standard outside of the abnormally high expectations of the crypto world.
So, maybe one answer to the question, “Why is the market down?” is, “It isn’t.”
That said, it’s small comfort to know that the wild ride of late 2017 was the anomaly, and now the markets are on a more steady path if it turns out that the path is going to go down from here. Are there other conditions in the marketplace that could account for the current state of affairs?
Asian Market Regulations
China, Korea, and Japan have all been very exciting, and very different, environments for cryptocurrency. China has become a massive hub of mining, particularly Bitcoin mining. Koreans have at various times been buying crypto at rates so much higher than other places that they’ve pushed up prices and created arbitrage opportunities.
For a time, Korean exchanges were removed from Coinmarketcap.com’s pricing indicators because they were so out of step with everyone else. Japan has been pushing forward on crypto innovation, with Yoshitaka Kitao, chief executive of one of Japan’s largest financial institutions SBI, saying that crypto could fuel Japan’s next economic boom.
However, in all 3 cases, government regulation has consistently loomed as a threat to the continuing good times. Especially in both China and Korea, reports of government crackdowns, real, imagined, or feared, happen on a semi-regular basis, causing fluctuations in the market.
Currently, China is considering its regulatory future, with a somewhat skeptical eye. The People’s Bank Of China has issued a report citing concerns that cryptocurrency could threaten the stability of the yuan, as well as the potential for cryptocurrencies to foster pyramid schemes and illegal activities.
Despite earlier, possibly entirely speculative, fears that Korea might make cryptocurrency trading illegal, they currently seem to be set on conforming to legal standards in line with other G20 nations.
Japan has remained the most positive environment for cryptocurrency, with local exchanges proactively self regulating and working with government authorities to prove that they are positive for the Japanese economy. The Japanese disposition to crypto seems to essentially be that it’s a good thing, so long as consumers are protected.
All told, though, the one thing all three have in common is a cooling off from previous unregulated booms in values. With regulatory compliance being emphasized, it doesn’t stop crypto trading, but it slows things down, and provides some market uncertainty until the final letter of the law is drafted.
Bitconnect may currently be the most famous ponzi scheme in the world of crypto, but it is far from the only one. It’s widely understood in the world of crypto that new coins are suspected of being pump-and-dump scams unless proven otherwise. Currently, according to some estimates, US$9 million is lost every day to cryptocurrency related scams.
As the cryptobubble ramped up in 2017, many, if not all, tokens were seen by some as an unregulated market in which people were throwing good money after bad. This perception wasn’t helped by the inevitable flow of people who seem to go wherever there is money being spent, offering exotic ways to buy, gamble, or speculate on crypto, with promises of quick and easy returns that should always be treated with skepticism.
There is definitely a seedy side to crypto, just as there is in almost any industry where profits can be made, and people took note. As cryptocurrency became a stock topic of mainstream media, the usual pundits were sought out for their opinions, and some had very negative things to say. Famous investor Warren Buffet, for example, said:
Cryptocurrencies will come to a bad ending because nothing is being produced in the way of value from an asset. There is also a problem that it draws in a lot of charlatans who are trying to create exchanges or whatever it may be.
Cryptocurrencies have become more well known than ever in 2018, but not necessarily in a way that helps. The amount of new money coming into the market is likely to be muted so long as it’s seen by many as a mere scheme.
The Annual Dip
For the last four years, there has always been a dip in January. No one knows exactly why. Is it because people in China withdraw some crypto holdings to buy gifts for Chinese New Year? Maybe in the west, when people are just coming down from the consumer frenzy of Christmas, people are tightening their belts again and spending less on speculative investments. Maybe people are moving funds around ahead of tax season, to try and minimize their tax obligations in one way or another.
It could be all of these, or none, or something else. The only part we know for sure is that it looks to be regular enough that you would be wise to anticipate something similar in January of 2019.
One major difference this time around, though, is that in previous years, the dip recovered in a matter of weeks or months. This time, we have not seen a clear recovery, but then again, the price from which the markets fell have never been as high as this most recent dip. The bigger they are, the harder they fall?
No one seems to be in doubt that blockchain technology will ultimately create markets and opportunities that people will make great profits off of in the future. However, along the way, there will be booms and busts, winners and losers.
Many might remember the dot-com boom of the late 1990s. Then, as now, there was no doubt that new emerging technologies, particularly the world wide web, would change the world. With the benefit of hindsight, we can now confidently say that it did. However, the dot com bubble crashed by around the year 2000, taking most contenders to the throne with it. While we remember the successes like Amazon and Google, countless others are long forgotten.
The market may be going down, but that only means one needs to be more diligent to sort out the Amazons from the Pets.coms.