January has not been the happiest of months for Cryptocurrency holders, we’ve seen the market bleed out continuously for weeks now. Many people are asking why this is happening, well its not really down to any one specific factor, but before we continue to look at the various factors which have led to this major correction it’s worth taking a step back to look at the bigger picture.
Bitcoin a year ago today was just breaking the $1000 levels, Ethereum was around the $10 mark and Ripple was at $0.0065. All three have received insane gains and even with the huge correction bringing all of these currencies down more than 50% from there all time highs they are all still out performing any other asset class. In fact even with a further 50% drop in valuation from today each Cryptocurrency would of been the one of the best investments you could of made – assuming you invested at least a year ago today.
Now let’s take a look at some of the major factors which have influenced this recent downturn in the entire cryptospace.
Regulation, Regulation, Regulation
Although regulation was an inevitable part of Cryptocurrencies future it has still caused much caution in the markets, China was the first major Country to begin shutting down Cryptocurrency Exchanges in mid-2017, which bizarrely caused little downturn in the markets, since then we have had mixed reports from South Korea on their intentions towards Bitcoin and it’s underlings. The South Korea reports have been somewhat contradictory and it would seem the media is mainly the cause of this. After weeks of confusion to what exactly South Korea intends to do, with many reports indicaing South Korea would likely to outright ban Cryptocurrency it would seem they actually have no intention of doing this:
South Korea’s finance minister said the government has no plans to shut down cryptocurrency trading, welcome news for investors worried that authorities might go as far as China’s tough action in blocking virtual coin platforms. – Reuters
Russia authorities have also had a huge clamp down on Cryptocurrency exchanges over the past 6 months, however they are not against Cryptocurrency itself, just illegally functioning exchanges. In fact in the past few days we’ve heard Russia will be voting whether to allow Cryptocurrency trading on ‘Official’ exchanges:
The Russian Ministry of Finance has drafted a new bill to legalize cryptocurrency trading on organized trading platforms and will submit it for a vote to the federal legislature in February, Russian media outlets reported earlier this week. – Newsweek
There have been multiple other Countries discussing regulation and outright banning of Cryptocurrency exchanges, however in just about all cases this is primarily a cautionary stance Governments are making rather than an offensive against Cryptocurrency. Did we really believe Governments would allow exchanges with no auditing and financial regulation to operate in a multi-billion dollar space?
Of course not, although most Governments will claim their intervention is required to protect it’s peoples money it is actually more to do with ensuring tax revenues can be collected from such operations. In an industry which has now surpassed far beyond what most sceptics ever could of imagined the potential tax revenue which is being missed is now far more significant than it once was.
Regulation was always going to come, however it is not a problem. The original purpose of Bitcoin and Cryptocurrency was to take away the middle man, do away with the banks and be safe from government intervention of our wealth. At the moment Bitcoin is still in it’s infancy and early adoption stages, it is still not considered as a form of payment and when it is it is usually via another third-party such as a Bitcoin debit card, which of course uses Visa as the payment processor. When a third party is involved regulation is possible through forced intervention, take away the third-party though and we have no means of enforcing such regulation. Centralised exchanges can be regulated as the exchange is a third-party for every exchange made between currencies, however with high performance decentralised exchanges just around the corner once again no Government could enforce regulation on these platforms.
Look what happened when they attempted to ban, shut down bittorrent – they couldn’t, in fact bittorrent usage is now more popular than it’s ever been and there is very little Governments can do accept make empty threats and enforceable regulations.
Scalability, Fees and Bitcoin Cash
Another cause of fear in the bitcoin market specifically has been the scalability of Bitcoin. Over the past year since the increased interest and thus usage of Bitcoin we have seen the speed of transactions decline dramatically and the coast of transactions go sky high, at one point the average cost of making a transaction on the Bitcoin network was up around $80. This brought huge conflict within the Bitcoin Community, so much so that part of the community created a hard fork and Bitcoin Cash was born.
Bitcoin Cash increased the blocksize to 8MB which allowed for more transactions to be processed in one block and thus dramatically reducing transaction times and fee’s, well at least temporarily.
We won’t get into the Bitcoin Cash / Bitcoin debate here as it’s a very unproductive debate anyway and who prefers what and which is best is purely a matter of opinion at this point in time. Since neither Bitcoin Cash or Bitcoin protocols are currently able to withstand mainstream adoption the conversation is moot anyway.
However, Bitcoin may have a solution, although still in it’s testing stages The Lightning Network, which is a second layer solution, if successful will allow for millions and perhaps billions of transaction per second at extremely low fees. Their are already hundreds of lightning nodes running on the Bitcoin mainnet as developers and enthusiasts test out the technology.
It’s also worth noting that the Lightning Network is not something which is purely for Bitcoin, it can be integrated into many Cryptocurrencies also which would end the debate on scalability and fees once and for all.
Those Pesky Tethers
More recently and in our opinion a large factor in the most recent downturn in Cryptocurrency is the news that Tether, the supposed USD backed crypto, has been Subpoenaed by the U.S. Commodity Futures Trading Commission, although this happened back in early December it only seemed to circulate the press until just a few days ago:
The U.S. Commodity Futures Trading Commission sent subpoenas on Dec. 6 to virtual-currency venue Bitfinex and Tether, a company that issues a widely traded coin and claims it’s pegged to the dollar, according to a person familiar with the matter, who asked not to be identified discussing private information. The firms share the same chief executive officer. – Bloomberg
It is since this news we have seen Bitcoins value finally crashdown through the $10k barrier to where it is today at just above $8k. Exactly what is going on with Tether is still unknown, what we do know is that so far the Company have been unable to successfully complete an audit which satisfies.
Humans are by their very nature Herd creatures, this mentality is reinforced throughout our lives vastly by the education system which was designed to create obedient workers for Society. Unfortunately a herd mentality doesn’t actually benefit the herd itself, it only benefits those who have managed to detach themselves from the herd.
Just as when we saw the value of Bitcoin skyrocket from $5000 to $20,000 in just a month we also are now seeing the same decline as these same people continue to follow the general consensus in what should be done. When you see everyone around you making money so many people will join their fellow man and join in, the bigger the herd gets the more feel the need to be a part of it. This occurs on the way up and the way down in all markets, especially new markets like Cryptocurrency.
As the value of Bitcoin dropped below $10k most of those who bought over the past couple months are being shaken out of the game, the majority will of sold at a slight loss with some selling at a huge loss. This pattern will continue possibly for a little while longer as those who see the value they bought in at come and go finally leave their HODL mentality behind and give into their emotions.
If the money you invested into Bitcoin or any Crypto asset was your life savings, money you are depending on to survive, then selling now is good advice, the stress and emotional trauma involved with trading, or should we say, gambling with your entire life savings is not worth the potential gains. Lives are destroyed everyday in any type of asset trading.
However, for those that who invested money they can afford to loose, or those that invested early last year who have already made their initial investment several times over and either diversified their gains into other assets or cashed out – these people will be likely just waiting for the bottom and then decide whether to invest some more. These people did not follow the herd, they are in the unique position to base their decisions on where the herd is heading.
The likes of Warren Buffet and George Soros have made their entire fortune by disconnecting from the herd, unfortunately as in both their cases disconnecting from the herd can also disconnect you from morality as well. So be careful, there is a reason that so many Wall Street traders are sociopathic – we need to still love the herd, in fact in many aspects of life it’s ok to join the herd, after all we are herd animals by nature, tribes and herds are one of the same after all.
Where Do We Go From Here?
To the moon of course! – Well, maybe. Seriously though, who knows at this point. What we do know is this, Bitcoin is still just a young pup, it has only just begun to gather interest in Wall Street, we have only just seen the Futures Markets delve into the Cryptospace, we have only in the last week seen the first cryptocurrency review from a major investment advisory group. The Lightning Network will be adopted over the next 12 months allowing for instant, low cost transactions on the Bitcoin network.
The Blockchain space is growing exponentially fast, new technologies and advancements in the space are being proposed everyday. 2017 was an exciting year for Blockchain and Cryptocurrency, 2018 on paper looks to be just as exciting, but this doesn’t necessarily correlate with Bitcoin and other crypto assets value.
This crash will likely of scared away many of the GRQ (get rich quick) people which have crowded the space over the past 6 months, Governments will react one of two ways, they will either decide the space is dead (again) and ease off on regulation and intervention, or they will do the opposite, they may see a time when the valuation of the market has already lost $250 billion from its all time high as a perfect time to bring in regulation.
In my opinion the latter is more likely, it is the most responsible thing to do, Cryptocurrency is unlikely to fade away to nothing and although many maybe feeling a little bruised right now in a few months this will be no more than a distant memory. So it would be better if Governments begun introducing regulation while the markets were down. After all regardless of what we feel about Government and their regulations, they exist, they will do it so it’s better now than when markets have settled and begun to build again.
Let us know what you think about the latest correction in the comments below.