Another week, another cryptocurrency headline. However, this week’s headline is vastly different than the countless ones that preceded it, this week we ask: is the bitcoin bubble finally popping?
The Formation of the Bitcoin Bubble
Analysts have always warned against an imminent bitcoin bubble pop after the asset class’ historic rise showed eerily similar signs to the early 2000’s dotcom bubble and the US subprime mortgage crisis of 2007. Recently, the general manager of the Bank for International Settlements berated bitcoin as a, “combination of a bubble, a Ponzi scheme and an environmental disaster.”
In 2017 alone, bitcoin soared more than 900% in value, entrenching it as the best-performing asset of the year. However, as our financial fluency knowledge has explained to us, meteoric rises over short time periods is often evident of an asset bubble.
In practice, an asset that is not intrinsically valuable, like gold, is only worth as much as someone is willing to pay for it. Therefore, many investors claimed that the cryptocurrency market was overvalued as it continued to rise into the tens of thousands of dollars without any obvious backing.
Bitcoin and the rest of the cryptocurrency market has always been extremely volatile evidenced by double digit swings seemingly every week. However, the recent skid has been unparalleled in losses, as the bitcoin bubble seems increasingly at-risk.
So How Bad is It?
After months of continuous record-highs, bitcoin and the rest of the cryptocurrencies have a taken a serious plunge.
Bitcoin, the leader of the cryptocurrency pack, fell below $8,000 for the first time since November 2017. After peaking at $19,511 on December 18, 2017, bitcoin has lost more than half of its value in the past 2 months. Bitcoin currently sits marginally above $7,000 after losing 34% in the past week and 57% in the past month.
The rest of the cryptocurrencies have not fared much better in 2018. Ethereum (ETH) is down to nearly $730 after peaking at more than $1,300 last month; it is down 30% in the past week alone. Litecoin (LTC) has lost nearly ⅔ of its value as it sits around $130 after peaking at over $330 in late December 2017; it is down 18% in the past week.
This week’s massive dip has brought the market value of cryptocurrencies as a whole down to roughly $400 billion, less than half of last month’s high, as it seems bitcoin is experiencing its first significant market correction.
What is Causing the Beginning of the Bitcoin Bubble Pop?
Although cryptocurrencies have been one of the most volatile asset classes in the past year for sometimes no apparent reason, several news stories have certainly helped lead to the beginning of the bitcoin bubble pop. And by keeping up to date with news, we can implement our financial fluency tools to improve the accuracy of our expectations of the market.
On January 30, Facebook announced that it was banning all future advertisements for cryptocurrencies. They cited the dangerously misleading and deceptive promotional practices associated with these advertisements for the reason of their banishment. The Facebook team continued to explain that the wording of the statement was intentionally vague so they can continue to adjust to the newfound market.
In December, the US Commodity Futures Trading Commission sent subpoenas to one of world’s largest cryptocurrency exchanges: Bitfinex. US regulators began questioning the relationship between Bitfinex, the world’s largest bitcoin exchange platform, and Tether, an unregulated cryptocurrency tied to the US dollar. Although Tether claims all of its coins are backed by US dollars, no conclusive evidence has proved this, causing regulators to investigate the issue further.
In January, federal agents raided the house of Jared Rice, the former CEO of a Texas-based firm called AriseBank, after questions arose about the firm’s upcoming ICO. AriseBank had been planning an ICO in late January, however, the SEC halted the offering after discovering the firm’s questionable financial backing and criminal records of several of its supporters.
More frequent crackdowns from US regulators have certainly spooked investors, but these crackdowns don’t necessarily hint at an outright ban on cryptos in the US, which is becoming the case in some places.
This past month, India announced that it no longer considered bitcoin a legal currency. The country vowed to ban the use of all cryptocurrency assets and their alleged widespread use for illegal activities.
In late December, South Korea announced that it was halting all trading of cryptocurrencies while banning all open cryptocurrency accounts. Lawmakers were also preparing legislation to allow regulators to close exchanges in case of mysterious and illegitimate activities. China has also banned all foreign bitcoin exchanges to guard against financial risk from hacking and a potential bitcoin bubble pop.
In late January, UK Prime Minister Theresa May announced she would look “very seriously” into bitcoin and other cryptocurrencies due to their illegitimate backgrounds and potential for criminal activities.
On January 26, Tokyo-based cryptocurrency exchange, Coincheck, was hacked for $530 million worth of its coins. This hacking exceeded the previous record set in 2014 when hackers stole $480 million from fellow Japanese exchange, MtGox. Japan is currently the leading market for bitcoin as it holds roughly ⅓ of all bitcoin trades.
What does this all mean?
As each new report of added regulation and continuous hacking of bitcoin exchanges, investors grow increasingly more worried about the security and sustainability of the crypto market. The rapid rise of bitcoin and its fellow cryptocurrencies was in part due to its decentralized nature and lack of regulation, allowing it to be used in a multitude of different ways. But as it continues to be scrutinized by regulators worldwide, it has lost that new car smell that made it so attractive to investors.
The bitcoin bubble showed its strength with historic returns in 2017, however, 2018 has already proved to be the beginning of the end for cryptocurrencies. With every currency down more than 25% since January 1st, the bitcoin bubble has shown the first signs of popping. With the long-term outlook of this market seriously at stake, it will be well-worth keeping an eye on any regulatory developments in the crypto space. By surrounding yourself with a greater understanding of the markets, you can continue to step closer to financial fluency.