Cryptocurrencies Have a Year-to-Date Market Loss of 75%. What Happens Next?

In January, the cryptocurrency market’s total capitalisation had reached $800 billion after a surge that started late in April 2017. A total market value at around $30 billion turned into a classic ‘hockey stick’ bubble. A little over 8 months on and three quarters of that value has again been shed and market cap has receded back to just over $200 billion. Many of those who were caught up in the frenzy and started investing online in cryptocurrencies as the market reached its peak have lost a lot of money. Others made a lot of money. Such is the way with financial ‘bubbles’.

That 2017’s cryptocurrency boom was a bubble is hard to deny despite the fact the market’s residual value is still several times what it was before last year’s bull run. Prices were driven up by speculators investing online in something they understood little of, behind the headlines and the fact that Rodger in accounts had invested £500 in Bitcoin at $2000 and it was now worth $20,000. Rodger might have sold or he might have ‘hoddled’ – holding on for dear life in optimism that things would turn around again. Rodger’s still doing ok and if he sold his Bitcoin at today’s exchange value of a little under $6500, he will make far worse investments. The guy who didn’t want to miss out while Rodger was sailing around the Caribbean on his new yacht and bought in at $15,000, not so much. Hopefully it was also for just £500.

We can now safely say the Bitcoin, or cryptocurrency, bubble has burst. A 75% crash in value qualifies. At the same time, while the hype has gone and the lady down the street with the annoying yappy lapdog is no longer investing online in the EOS ICO, cryptocurrencies are still around. Not only are they still around but it shouldn’t be forgotten that despite the crash the market is still immensely more valuable than it was pre-bubble.

The two biggest commodities and futures exchanges in the world, the CME and Cboe, also now offer Bitcoin futures. Intercontinental Exchange (ICE), the owner of the NYSE and a phalanx of other major international exchanges, is setting up a regulated Bitcoin exchange with Microsoft, Starbucks and the Boston Consultancy Group as partners. Fortune magazine says “the goal is to clear the way for major money managers to offer Bitcoin mutual funds, pension funds, and ETFs, as highly regulated, mainstream investments”.

Bubble or no bubble, cryptocurrencies have undeniably made progress and are in a stronger position than this time last year. The question is, what happens next for cryptocurrencies? The market could continue on its bearish trajectory, CME and Cboe discontinue Bitcoin futures and enterprise-level use cases for blockchain technology fail to gain traction. But that, at least all three, appears, while not impossible, unlikely. So where next?

A period of consolidation is perhaps most likely. While the boom and bust of the past year or so was by far the biggest yet it was also not the first. The history of Bitcoin and cryptocurrencies has been characterised by a number of periods of hype and prices running up before dropping back again. Each time the market has come back stronger following a lull. Regulatory frameworks will be key and there is clearly a natural cap on the number of viable cryptocurrency alternatives which is far below the 100 or so currently listed on cryptocurrency exchanges. The era of of flakey, sometimes fraudulent, unregulated ICOs (blockchain projects raising money in a crypto equivalent to IPOs) raising millions to hundreds of millions just by mentioning the word ‘blockchain for (insert industry)’ is presumably, and hopefully, over.

But would ICE, the CME, Cboe, Microsoft, Starbucks and the rest be investing in a cryptocurrency future now if the ‘fad’ is on the verge of disappearing back from whence it came? Of course not. They might be wrong of course but these financial institutions and companies, which are among the biggest in the world, think that while the ‘bubble’ has burst, the trend remains. The dotcom bubble burst, so have housing bubbles. The tech and property sectors are doing alright despite that. Tulip bulbs are still even bought and sold. The cryptocurrency market’s story is also almost certainly not over.