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Analysing the price behaviour of the volatile cryptocurrency market

  • A brief introduction on the types of cryptocurrencies
  • Reasons for the spike in 2017 and the slump in 2018
  • Is cryptocurrency a bubble?

 

On November 15, 2018, the market capitalisation for cryptocurrencies stood at $184.51 billion, which was 351% lower than its peak on January 7, 2018 ($831.39 billion). 2017 was the year of boom for cryptocurrencies, with a mammoth elevation in the market by over 3,000% (comparison of the market cap on Jan. 1 and Dec. 31). However, after reaching its pinnacle in January 2018, the market crashed and has since been dwindling. In Televisory’s earlier blog, Blockchain, an emerging concept, a disruptive technology, we tried to explain the evolution of cryptocurrency and its technical know-how. In this blog, Televisory attempted to understand the volatility in its prices.

Presently, there are 2,080 types of cryptocurrencies, with Bitcoin (BTC) dominating the market at a share of 53%. Ethereum is the next largest currency with 10.02% of the market share, followed by Bitcoin cash and Litecoin at 4% and 1.38%, respectively. It is due to its largest market share that BTC actually drives the market and its price has a massive impact, especially on the smaller currencies. The majority of trade happens with BTC as a base currency rather than the usage of the standard currencies like USD or EUR. Moreover, when the overall market is bullish, investors feel safe to buy more of other cryptocurrencies as their risk-taking capacity get enhanced. Further, if the market is bearish, investors feel protected by converting their currencies into Bitcoins (or conventional currencies).

On December 16, 2017, the price of Bitcoin reached its all-time high of $19,497, which was 1,853% higher than its 1st January price (chart above). In fact, Ripple followed by the NEM and Ardor among others were the best performing currencies in 2017 and surpassed Bitcoin, which was in tandem with the bullish trends as mentioned above.

Let us now try to understand the reasons for skyrocketing of the prices in 2017:

  • Investments: although Bitcoin had been in existence since 2009 and along with Ripple and Litecoin started to gain momentum in 2013, it was only in the last year that the investments surged in this industry. The retail investments from China, Japan and Korea kept the prices soaring in the 1st half of the year, while a high number of institutional investors from the US pushed the prices in the 2nd half of 2017. Thus, such sturdy investments reflected in the prices of cryptocurrencies. It took long for hedge funds, HNIs and the family offices to gain confidence in the market, but this eventually happened in 2017.
  • Visibility: more and more people became aware of the concept and started searching for the same. Cryptocurrencies gained attention on the social media, online news and the word spread at a faster pace. As per the data from the Google Trends, the search interest in the term ‘Bitcoin’ reached an all-time high on November 12, 2017. Furthermore, people other than investors were eager to decipher the market.
  • Rising Initial Coin Offering (ICO): a high number of ICOs have created more value for cryptocurrencies. More of cryptocurrency was floated, exchanged and denoted a monetary value. According to the data from ICO data, the number of ICO’s in 2017 was 875 as compared to a meagre 29 in 2016. The funds raised in 2017 were approx. $6.2 billion, this was in extreme contrast to just $90 million in 2016.

 

What caused a sudden slump in 2018?

The market for cryptocurrencies started to fall soon after the high on 7th January and it has never seen those levels again. As of November 27, 2018, the cryptocurrency market was as low as $122 billion. Hence, after a year of an upswing, it faces a year of a slump. The following are the reasons for this downward trend:

  • ICO scams: when investors are keen to toss their funds towards a highly speculative currency, it increases the probability of fraudulent practices being pursued in the industry. A lot of ICOs took place wherein the companies had no intention to complete a project but raised tokens and then sold off the currency in order to mint money. Three of the biggest scams were Pincoin, AriseBank and Savedroid, which raised $660 million, $600 million and $50 million, respectively. According to the data by Satis Research, an appalling 78% of the ICOs were a scam, with only 15% getting listed and the remaining were a failure.

 

The below graph represents the grading of ICO’s as per their market cap. 41% of the ICOs within the coins/token with a market cap of $50-100 million were dwindling and only 38% ICOs were successful. While for the ICOs with a market cap of over $1 billion, the success rate was much higher at 85%. This implies that small companies with a low market cap were not performing as well as the big players.

  • Vulnerability to cyber threats: being a decentralised system, with hardly any regulations, blockchain is more susceptible to hacking. One of the biggest attacks happened earlier this year and coins worth $500 million were stolen by hackers from Coincheck, a Japanese exchange of cryptocurrencies. These security threats create tension in the market and thus, prices fall as an implication.
  • Lack of regulation: the ICO market is highly unregulated, which leads to high manipulations. ICOs are not subject to regulatory standards that other security offerings need to comply. A lack of accountability thus leads to money laundering, tax evasion and other illegal practices. There is also a threat that unregulated crypto market may negatively affect the conventional financial system. This again adds to price volatility that ultimately leads to financial losses.
  • Advertisement ban by social media platforms: in March 2018, Twitter followed Facebook and Google as they decided to ban all crypto-related ads. Hence, after the announcement by Google, the market dropped by almost 10%. The decision was taken as a lot of companies in the crypto market were not operating in good faith. Facebook reversed this decision by allowing ‘pre-approved’ crypto firms to advertise, however, it still maintains a ban on ICO. In October, Google also allowed ‘registered’ crypto exchanges to buy its ad words space.
  • China’s ban on cryptocurrency: in Sept. 2017, China decided to ban cryptocurrencies trading on the exchanges operating in the country. It is believed that a decentralised network can pose a threat to the supremacy of otherwise well controlled/centralised economy. In February 2018, China made further restrictions by blocking access to cryptocurrency and ICO related websites. This obviously transferred to the prices of cryptocurrencies.
  • Bitcoin cash hard-fork: the most recent reason for the fall in the market was the hard fork of Bitcoin Cash (BCH) on November 15, 2018. BCH was split into BCH ABC and BCH SV and a considerable amount of mining power was shifted from BTC to BCH. BTC’s hash rate was decreased by 7% in the period from November 10 to November 17 due to the hash war between ABC and SV. This was thus represented in a form of a further dip in the already falling market.

 

The shrinking crypto market brings us to an interesting aspect, is cryptocurrency a bubble?

The famous economist, Nouriel Roubini, who predicted the crisis of 2008, called cryptocurrencies ‘the mother of all bubbles’ when the price fell below $8,000 earlier in the year 2018. Presently, the price is hovering below $4,000, almost 275% plunge from the beginning of 2018. But the flip side shows that those who bought the currency earlier in 2017 at a price of around $1,000, are still reaping gains of 300%.

The situation might not have worsened if the currencies would have been limited to the likes of Bitcoin, Ethereum, etc. But with so many new cryptocurrencies being swirled around, each with a hope of attracting more and more buyers, the valuations were misleading. This bubble appears to be similar to the dotcom bubble of the late 90s, wherein, as per the research by the New York Times; 52% of the internet companies formed since 1996 no longer existed by 2004. The crypto market is thus seeking consolidation wherein bigger currencies may survive the market in the long run, in line with Google, Amazon and eBay, which survived the dotcom bubble and are thriving at present.

Many believe that the prices of 2017 and early 2018 were a result of the market manipulation. A lot of big/rich investors accumulated coins over the course of several days, leading to price rise and thereby, attracting new investors due to the fear of a miss out. Flooding new money created a further upsurge in the market and gradually the big players began to sell their currencies to earn profits. The sell-off took place in instalments so that it may seem that the price is falling temporarily until most currencies were sold and the entire market got into a slump. This along with the price still being higher than early 2017 makes one believe that the market is currently going through a price correction mechanism.

What lies ahead?

As the internet was back in the day, blockchain is currently facing resistance because of the disruption associated with the currency. However, the future does not seem to be bleak. Whether cryptocurrencies displace current financial system and get accepted as fiat currencies is a long-term proposition, but it has an enormous potential to be accepted by more companies as it will reduce the third-party costs and streamline processes by removing unnecessary intermediaries. The blockchain combination with AI (artificial intelligence) is already creating a plethora of opportunities that cannot be ignored. A few projects that have already integrated blockchain and AI are SingularityNET.io, a platform to buy and sell AI capabilities, Namahe expects to integrate AI into the supply chain, DeepBrain Chain is establishing an AI cloud network, Bot Chain; a chatroom, Indorse; a skills network like LinkedIn and Dateme.io; a dating site. All of these use the best of both the dynamic technologies with the aim of providing a decentralised and effective system for the daily life of the masses. Thus, it will be too soon to write-off cryptocurrencies.

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