Here's how the cryptocurrency market will recover
By Stan Schroeder, Mashable
In the past month or so, bears have ruled the cryptocurrency market.
You may not think that's a very long time, but given how fast the cryptocoin market moves, this is not some temporary flash crash. It's a hefty correction that threatens to turn into a bear market, akin to Bitcoin's slump in Jan. 2014, when price went down for about a year before they started rising again.
At roughly 137 billion dollars, Bitcoin is still the largest cryptocurrency by market cap, and it's still leading the market; when Bitcoin experiences a big drop, other coins follow.
But why is the price of Bitcoin going down? Well, the factors are numerous, and they start with tremendous growth Bitcoin has experienced in the last year or so. Even at current price of $8,400, it's still up roughly 850 percent year-over-year. If you're an early investor, there's still a lot of room there for profit taking.
Typically, an asset's price won't drop far below the market's assessment of a fair price — or at least it won't stay there too long. Apple stock might fall on news about bad iPhone sales, but if the company's revenue is up — exactly what happened last week — you won't see a huge selloff.
But if you're trying to determine a fair price for Bitcoin, you'll likely hit a wall. Bitcoin's fundamentals are notoriously hard to define. Large developmental changes are either absent or far off at this point. Retailers are shunning Bitcoin as of late, and most people that buy the coin do so to keep it, not to use it as a means of payment.
One thing Bitcoin has had in abundance lately is bad news. Check here for an overview, but a short summary includes stricter regulations in countries like South Korea and India, an outright ban in China, tons of cryptocurrency-related scams, and warnings from numerous prominent investors about the dangers of investing in Bitcoin.
Predicting how low — or high — Bitcoin and other cryptocurrencies can go is dangerous. But it's a good time to try to find out why the market is reacting in such a way, and what needs to change for it to stabilize. Will we have to wait for technologies like Lightning Network (on Bitcoin) and Proof-of-Stake (on Ethereum) for the market to react positively? Will regulation bring stability? Is it all just a worthless bubble being deflated?
I've asked a few experts to share their thoughts on the cryptocurrency market's future; here's what they told me.
Regulation is good
Nikolay Storonsky, the CEO of digital banking alternative Revolut, sees regulation as positive. "Consumers need protecting, and the space needs to evolve if widespread adoption is ever going to occur," he told me via e-mail.
Charles Hayter, the CEO of crypto comparison platform CryptoCompare, agrees. He told me in via e-mail that the current situation a "healthy" but "large short-term correction."
According to Hayter, most of the regulatory movements we've seen lately are positive and will "bring rigour and long term stability." This goes even for the recent ban, enforced by several major U.S. and UK banks, of bitcoin purchases via a credit card.
"The credit card blocking was a sensible move — allowing people to buy speculatively on a loan has had historical precedence for being imprudent and adding fuel to the fire," he wrote.
Trevor Gerszt, the CEO of digital currency savings company CoinIRA, told me via e-mail that the credit card ban "could actually be a good thing, keeping less creditworthy buyers from being able to leverage cheap credit to impact Bitcoin prices."
Where does the smart money go?
Laws and regulations might help stabilize the market long-term, but they probably aren't enough to move it upwards. But there are positive signs on the horizon. Billions have been raised via initial coin offerings or ICOs, and numerous businesses, big and small, have expressed interest in blockchain technology.
"What we have is a lot of businesses and capital — human and financial, ICO's aside — looking to make this work," said Hayter. "We will only see the quality and functionality of crypto currencies improve in all their guises, whether it's as rewards, platforms, currencies, bearer certificates, or forms of utility and trust."
An ecosystem of useful blockchain apps coupled with sound regulation sounds nice enough, but it won't happen overnight. There are pointers, however, that the cryptomarket might get a positive jolt in the near future. From an investor's perspective, especially given the latest Dow Jones slump, Bitcoin and other cryptocurrencies provide an interesting alternative.
"If the Dow’s 1,200-point drop is indicative of jitters in the market and stock markets continue to perform poorly this year, we would expect a rebound in cryptocurrency prices as investors flee to them as a safe haven from plummeting stock prices," said Gerszt.
Will it get worse before it gets better?
Numerous investors with Wall St. credentials have recently expressed their skepticism towards Bitcoin. Legendary investor Warren Buffet said he doesn't really understand it and Yale University professor and a winner of Nobel Prize in economics, Robert Shiller, compared the cryptocurrency market to the infamous tulip bubble.
But crypto insiders still see vast potential in this new asset, volatility be damned. All three experts I've contacted for this story are bullish on the crypto-market's long-term prospects. And according to Gerszt, we may actually be out of the woods already.
"With the crackdowns occurring in China we’re seeing a fair amount of turmoil and fear. There’s really nothing for investors in the US to be afraid about... Now that China seems to have gone as far as it can go, we should have reached the end of downward price movements based on fears of further Chinese government action."
While China hasn't been very benevolent towards the cryptocurrency market, numerous countries, including Russia, Estonia, and Venezuela, have expressed interest in launching a national cryptocurrency. Crypto traders might not be able to quickly flip these on the market, but if these plans come to fruition, everyone might benefit. According to Hayter, these nationalized coins "will have a large part to play in increasing the velocity of money and hopefully lifting GDP and wealth for all."
It's hard to say how the market will swing and when the sentiment will change. In fact, it may have already changed; when I started writing this text, Bitcoin's market cap was $37 billion less than it is now. But perhaps investors shouldn't be worried about short-term price fluctuations and instead focus on the technology.
According to Storonsky, the price of this or that cryptocurrency isn't the only indicator of the market's health, and perhaps it's not even the most important one. "We’ve seen huge crashes such as these before, and we’ll see them again. Remember, we’ve only seen the tip of the iceberg, the potential is huge and cryptocurrencies have a long way to go," he said.