Since hitting an all time high in late 2017 the cryptocurrency market has plunged over 70 percent.
Last December saw the market capitalisation of cryptocurrencies as an asset class peak at over USD800 Billion. The current market capitalisation of ~USD250 Billion is just a fraction of what was once a booming investment sector a mere six months ago. So were cryptocurrencies in a bubble? Was the evolution of this once exciting industry just a flash in the pan? And most importantly, are cryptocurrencies dead?
Asset price bubbles always end in a speculative mania which involve euphoria and the fear of missing out (FOMO). The final run up in prices last year certainly had aspects of a speculative nature. Google searches for Bitcoin and other cryptocurrencies rose exponentially, Facebook walls were littered with advertising for the latest ICO, and exchanges were overwhelmed with tens of thousands of new daily signups. In an example reminiscent of the dot com bubble of the late 1990s, the Long Island Ice Tea Corp saw a three fold increase in their share price when they announced a change in their name to the Long Island Blockchain Corp. A simple name change which included the word “Blockchain” was all that it took to triple the company’s share price.
Speculative bubbles eventually pop, and there’s no denying that cryptocurrencies are now in a very deep bear market. So is this the end and are cryptocurrencies dead? Referring to bear markets, Warren Buffet once said:
“Only when the tide goes out do you discover who’s been swimming naked.”
This statement is particularly true when applied to the current crypto bear market. The dramatic fall in market cap and the decline in exchange volumes will determine which coins and companies in the cryptocurrency space will survive, and which will die off as the sector continues to deflate.
Crypto bear markets are cleansing events that reveal which exchanges are solvent, which projects are healthy and which coins offer real world value. Now that the speculative money has exited the market, new and existing coins will have to compete for market share from a limited investment pool based on the value proposition they offer the holder. The weaker coins which offer no real world usefulness or value will not survive the purge as the ecosystem grows leaner and stronger.
So what about Bitcoin? Is Bitcoin dead? It’s interesting to note that according to the webpage Bitcoin Obituaries, Bitcoin has been pronounced dead by the mainstream media a total of 319 times. Bear markets in Bitcoin are extremely violent, however it is still a new technology with huge potential and promise.
The two previous bear markets in 2011 and 2014 saw the price fall 90 percent and 83 percent respectively, so a price decline of the magnitude experienced in the first half of 2018 is not uncommon. With layer two solutions like the Lightning Network planned to be rolled out towards the end of the year, Bitcoin’s usefulness in commerce should continue to grow in the future.
Crypto bear markets serve as a great opportunity to assess which coins offer value and which coins were bid up in price based purely on a speculative gamble. Bitcoin offers censorship resistant, trustless value transfer. It has the deepest liquidity of any cryptocurrency, the highest hash rate (network mining power) and is perhaps the only unconfiscatable asset class in the world. If the characteristics offered by Bitcoin remain useful, then the future remains bright for Bitcoin regardless of its price.