Is the 2018 Cryptocurrency Collapse Finally Over?
2018 has not been a kind year to Cryptocurrencies nor their legions of rabid fans. After reaching a Peak Total Market Capitalization of about $825 Billion on January 5th, 2018, the Cryptocurrency Sector tumbled to the $190 Billion level by mid-September (https://coinmarketcap.com/charts/).
The loss of 77% in just 8 months closely fulfills the typical retracement following an asset bubble collapse. The Nasdaq 100, for example, lost 85% following the Dot Com Bubble bursting in 2000. The Cryptocurrency Sector is currently valued at $211 Billion, a change of only 6% from its market value of $198 Billion exactly 1 year ago.
What Kind of Assets Are Cryptocurrencies?
Cryptocurrencies have characteristics that make them UNLIKE any other type of asset. They are NOT, however, to be confused with a “currency”, like the dollar or Swiss Franc. A currency must be both a medium of exchange and a “store of value”. Cryptocurrencies are neither.
Bitcoin, whose value is more than HALF the entire sector, has not fulfilled its potential. Its champions predicted a revolutionizing of banking. Bitcoin’s decentralized stucture was thought to be a threat to the Federal Reserve.
Very few transactions or commerce are denominated in Bitcoins. In fact, the list of businesses that take Bitcoin is embarrassingly short and devoid of any MAJOR retailers (https://99bitcoins.com/who-accepts-bitcoins-payment-companies-stores-take-bitcoins/). Only Overstock.com is a retailer of any note. Notably absent are Amazon and Walmart. Amazon has been rumored to be developing its own Cryptocurrency.
Equally disturbing is how many customers Bitcoin has lost (https://www.dealnews.com/features/Wow-Heres-Retailers-That-Take-Bitcoin-And-That-Stopped/2206253.html). Marquis firms such as Expedia, Dell, and PayPal are now EX-Users. As a currency, Bitcoin continues to be an abject failure.
The volatility of Bitcoin has been a major impediment to its adoption as a medium of exchange. What good is a currency whose value may rise or fall 25% in a day? If you would like a good refresher course on Bitcoin, please see our publication: “Bitcoin or Bustcoin?” (https://markonomics101.com/2017/12/21/bitcoin-or-bustcoin/).
Cryptocurrencies Share Similarities to Commodities and Collectibles
Unlike equities, Cryptocurrencies have tended to trade “as a group”. Individual Cryptocurrencies have experienced very little differentiation in return amongst themselves. This “high correlation” is also common among commodities and collectibles: “Inflection Point (Part 4) Cryptocurrencies: Commodities or Collectibles?” (https://markonomics101.com/2018/08/04/inflection-point-part-4-cryptocurrencies-commodities-or-collectibles/).
Unlike Commodities, Cryptocurrencies have dubious use, other than as “trading” vehicles. They are not an input or raw material to anything. Accordingly, it is impossible to establish any source of demand, except for anonymous transactions.
This lack of differentiation among various currencies is a significant negative. It strongly suggests there is no specific “technology”, or competitive advantage for any of the currencies. With Bitcoin hardly demonstrating any commercial success, the opportunity to gain on, or surpass, this original market “flagship” would appear to be wide open.
Lately though, things are changing in Crypto-Land.
Recently, Cryptocurrency Volatility Has Plunged.
The last year of volatility in Cryptocurrencies has been breathtaking. Within the last calendar year, the Sector has gained 400% only to lose that entire rise! Daily moves exceeding 10% have not been uncommon.
For the last 3 months, however, the Sector has exhibited far LESS volatility. The trading range has been narrow between $190 Billion to $240 Billion.
The larger capitalization issues are illustrated in the Slide Show below. Note, that each are tracing out “Coil” or Triangle Patterns. These are patterns of compressing and dampening volatility, or greater stability. Very often they accompany a change in overall direction.
Lower volatility suggests that many, if not most, of the “Get Rich Quickers” have been forced out. The remaining holders are more likely to be stable longer-term true devotees. As a result, they are not prone to make sudden rash buys or sales. A more stable base of holders should ultimately reduce the volatility of the cryptocurrency sector.
Individual Issues Starting to Differentiate.
The statistical correlation among issues exceeded 90% just four months ago: “Inflection Point (Part 3): The Ultimate Cryptocurrency Surprise” (https://markonomics101.com/2018/07/17/inflection-point-part-3-the-ultimate-cryptocurrency-surprise/). This level of correlation is similar to what would be the norm for Oil and Gasoline prices or Gold and Silver prices.
Recently, some differentiation has become noticeable among various crypto issues. According to Bitscreener (https://bitscreener.com/), out of the top dozen issues or so by market capitalization, 3 have suffered substantially smaller losses over the last 6 months: Bitcoin (BTC) down 27%, Ripple (XRP) down 29%, and Stellar (XLM) down 16%. The rest, including Ethereum (ETH), Bitcoin Cash (BCH), and Litecoin (LTC) have suffered 6-month losses of 60-80%.
The interest in Ripple is probably the result of its expanded use in electronic fund transfers. While this certainly may inure to the benefit of Ripple Labs, the parent of XRP, it may not benefit the currency at all. For more information: “Ripple’s Triple Gives New Hope To Cryptocurrency Investors” (https://markonomics101.com/2018/09/24/ripples-triple-gives-new-hope-to-cryptocurrency-investors/).
Currency Population Continues to Explode
At the beginning of 2018, there were roughly 1600 currencies in existence. Today, that number is well in excess of 2000 and may even be closing in on 3000. CoinMarketCap follows 2094 issues and BitScreener 2736 issues.
It is not typical for new entrants to continue to flourish after the bursting of a bubble. It certainly indicates the perception of a promising future.
Venezuela has been stepping up efforts to launch its own cryptocurrency, the “Petro”. Caracas has pitched use of the digital currency for oil transactions among OPEC. The Petro recently went on sale with a big push from the government for its adoption (https://www.zerohedge.com/news/2018-11-09/venezuela-pitches-petro-opec-unit-account-oil). The Petro is to be backed by Venezuelan Crude Oil.
Demons Still Plague Cryptocurrency Sector
The dark side of Cryptocurrencies includes constant thefts, exchange hacks, and scams. This ongoing bad publicity continues to chip away at the perception of safety. A currency must be “safe” to gain widespread confidence and adoption.
In addition, Cryptocurrencies are very difficult to use and understand. They are still linked to a desire for anonymity in transacting “black market” business out of the view of tax, custom or legal authorities.
The process of clearing transactions and creating new Bitcoin supply, called “Mining”, is reportedly an ecological disaster (https://www.ccn.com/bitcoin-mining-consumes-over-3x-the-energy-of-gold-mining-research/). “Miners” are groups of computer jocks who process transactions in Bitcoin in exchange for the new issue of coins to them.
Bitcoin is commercially insignificant, yet the computing requirements of “Mining” uses as much electricity as the entire country of Ireland (https://arstechnica.com/tech-policy/2018/05/new-study-quantifies-bitcoins-ludicrous-energy-consumption/). This creates a HUGE impediment to future growth in adoption.
Valuation Hard to Pinpoint
Without any cash flows or profits that we can ascribe to Cryptocurrencies, valuation remains a significant question mark. Keep in mind, that many items, such as art, can have substantial value without generating cash flow.
It would appear some positive changes may be afoot in Cryptocurrencies, but significant questions remain. The industry neither shows signs of revolutionizing banking and electronic transfer nor dying. One thing is certain. With a current market capitalization in excess of $200 Billion and new entrants fighting for position, the Cryptocurrency Sector is not ready to “Rest In Peace” yet.
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