Are Cryptocurrencies Really Finished?

Cryptocurrencies gradually faded out of the news over the course of 2018. If 2017 was the year that the digital pretenders to the fiat monetary system broke into mainstream consciousness and gold rush hype, as Bitcoin raced towards an exchange value of $20,000, then 2018 was supposed to be the year of a spectacular bubble burst. Except it didn’t really burst. The last 14 months have more resembled a slow puncture to the cryptocurrency market.

Source: Coinmarketcap.com

‘Real’ financial bubbles are supposed to ‘burst’ spectacularly with valuations plummeting to the floor. Like the ‘Tulip Mania’ of the 17th century Netherlands that mainstream media pundits were so keen to compare the cryptocurrency market to.

But that hasn’t happened in the case of Bitcoin and the wider cryptocurrency market. By January Bitcoin’s value had dropped to around $15,000 and by February below $8000, but then it picked back up to above $11,000.  Then back below $7000 and back up above $9000 in May. The slide down towards $3500 since, has been a drawn-out, gradual affair and prices have since climbed back towards $4000.

Cryptocurrencies are holding on. They may not make the news very often anymore, other than when the founder of Quadriga CX, Canada’s largest cryptocurrency exchange, met an untimely end and took the only password to an estimated of £145 million in crypto-assets with him. But they are still there in the background. Intercontinental Exchange (ICE), owner of the NYSE and a portfolio of other major international financial exchanges, is setting up a regulated Bitcoin exchange called Bakkt. Microsoft and Starbucks have been reported as backing the venture and an investment round of close to $200 million was announced in January. The funds will be used to build out Bakkt’s cryptocurrency futures trading platform.

ICE are not enthusiastic college graduates with some family backing, good presentation skills, able to convince other investors, and with little to lose. This is an established, regulated and high profile, global financial services brand. It still, apparently, believes cryptocurrencies have a future. It’s putting its name to an exchange that is planned to be regulated. Governments and financial regulators are still commissioning white papers and reviews of the cryptocurrency sector. None of that is really in keeping with a burst bubble and the end of the road for cryptocurrencies.

At the same time, the wider public seems to have lost interest and valuations have dropped massively. It’s difficult to see any scenario where we can start buying stuff on Amazon in Bitcoin any time soon. Add in that a plane going down with one guy with a password means £145 million is forever irretrievable and it’s easy to see the arguments why cryptocurrencies don’t sound like a system that will cure the ills of the modern financial world.

So are cryptocurrencies done and just managing to hold on long enough for their demise to be a drawn out, lingering one? Are enough people and institutions just too embarrassed or afraid to admit they were pulled into a collective delusion for cryptocurrencies to go away as quickly as they probably really should? Or does the last year and bit simply represent a regrouping? Hot air has been taken out of the market and work is being done in the background to put the right infrastructure in place for cryptos to go mainstream. There is also a theory, which could be described as conspiratorial, that financial institutions needed crypto valuations to come down before getting in on the action.

The fact of the matter is that cryptocurrencies are still several hundred percent up on where they started 2017. At least with reference to the major cryptocurrencies. Yes, I think it’s safe to take a risk and say 2017 represented a cryptocurrency market bubble. The key question is what kind of bubble? Because there are definitely different kinds of asset bubbles.

The dot.com bubble wasn’t the same kind of bubble as Tulip Mania. Early internet companies with almost no revenue and untested business models soared in value along with the sector as a whole between 1995 and 2000. The market crashed and the NASDAQ, the Wall Street exchange that hosted most of the dot com companies, lost 25% in a week and continued to slide thereafter.

As is usually the case during severe stock market crashes, the bursting of the dot com bubble was triggered by a coming together of a number of catalysts. First, was an environment of bloated valuations at the end of a market bull run. Second was a significant rise to interest rates. Third was Japan entering a recession which scared equities markets globally. Fourth was a big, somewhat sensationalist if with a core truth, cover story published by Barron’s under the headline “Burning Up; Warning: Internet companies are running out of cash – fast”.

A raft of companies did go to the wall in the wake of the bubble bursting. Online retailers such as Pets.com and Boo.com and communications corporations including Worldcom and Global Crossing. But many others survived. Cisco’s share price nosedived 86% and chipmaker Qualcomm also lost a huge chunk of its value. Amazon slumped as did eBay. Most of those companies are not doing badly now and just start to think of the internet-based companies that followed. Facebook, Netflix and many more. Tech companies with online business models rule the world.

The net result of the dot com bubble is that it sorted the wheat from the chaff. Internet usage had just gone mainstream and investors got over excited. They ploughed money into companies willy-nilly and that drove up valuations everywhere as well as creating hugely valuable companies with poor business models, structures, processes, management, and oversight.

Ultimately, that benefitted the sector and it has gone from strength to strength. And if it’s not exactly a copy and paste scenario, it can be very easily argued that what happened to the cryptocurrency market over 2018 bares far more similarities to the dot com bubble than it does to the tulip bubble. Is it not more likely, given the evidence, the cryptocurrency sector is regrouping, reorganising, weeding out the weak, and giving the strong and new entrants a wake-up call to get their house in order. Don’t be surprised to see cryptocurrencies in a much stronger place than they were at the end of 2017 in 5, 10, or 20 years. There is plenty of historical precedent to the 2017 cryptocurrency bubble and it’s not Tulip Mania.

Steven King
We’re a new age Broker providing clients access to the Global Financial Markets by using only Crypto Currencies.