The wild and wacky market thus far in 2018 has tested all but the most solid – and some would say delusional – players. The all-time highs reached in December lasted for barely a month, eventually reaching a nadir in the February timeframe. The recovery from that drop has occurred in fits and starts, with a hefty deal of fear, uncertainty, and disinformation (FUD) on the side. We’re going to take a look at the anatomy of the volatile December-February period and attempt to souse out what could lead the market out of its current rut, with the usual caveat that nothing is ever certain in the cryptosphere.
The Bubble, Burst
In December, Bitcoin crested the $20,000 mark. To many outside observers, this was the dawn of a new age for cryptocurrency. The previous high had been shattered, and Bitcoin seemed to be dragging many Bitcoin alternatives along for the ride. Ripple, a coin with a total supply of 100 billion, reached the incredible price of $3.65 during this period. As a result, a lot of new money entered the market as small-time crypto evangelists met with their families over the holidays and preached the crypto gospel. Not jumping in was madness, they argued. The market was in the midst of a new Bitcoin pump, the same kind of pump that turned digital pizza change into millions. But this time, it wasn’t just Bitcoin. Every coin seemed to be on the verge of mooning. And there were so many to choose from, some with prices well below a cent. Who could resist the idea that a $5 bill thrown into crypto today could be worth thousands in just a few weeks?
Psychology of a Market Cycle, Image by Wallstcheatsheet
Just like that, however, the December bubble burst. That wording is contentious, but few would argue that December represented a unique point in crypto pricing history. Financial observers are still split on what exactly caused the sudden price increase, though a sudden uptick in trading volumes is almost certainly at the root of it. What all can agree on, however, is that the price increases were unsustainable. Few commodities or securities, in fact, can tolerate a market that increases by $2,000 in 20 minutes – something Bitcoin handily did on Dec. 7.
Just as there are differing opinions on what caused the sudden increases, there are differing opinions as to why the subsequent crash led to such a prolonged rut. We’re still in that rut, in fact, as most coins seem to have stabilized around their late-February, mid-March prices. Understanding exactly why the rut persists is probably key to discovering what factors will lead to the next bull run.
The Asian Tiger
Asia has been a bit of a wildcard so far this year concerning cryptocurrency. China has gradually softened its view, as have Korea and other major Asian financial markets. The uptight nature of these markets, in fact, has been cited as a factor in Bitcoin’s struggle to recover from its January crash.
That appears to be changing quite rapidly, however. Cryptocurrency is a natural fit for some Asian markets in surprising ways. China’s previous hostility to cryptocurrency has abated somewhat now that the centralized government has realized that some coins – notably EOS – can be manipulated for the country/party’s interests. This isn’t necessarily a terrible thing for cryptocurrency as a whole despite the Orwellian undertones. Official Chinese adoption means a huge surge in new investors, and that will likely have a tremendous bleed-over effect to non-state economies. It’s an open secret in China, after all, that the party doesn’t mind a little capitalist dabbling on the side. China has even launched its own monthly ranking of 30 cryptocurrencies. Predictably, EOS tops the list, with Bitcoin coming in at a distant 17th.
There’s an interesting tech sideshow concerning China, as well. U.S. President Donald Trump’s well-known 232 tariffs on steel and aluminum have a smaller, uglier cousin – the 301. The 301 case is a direct assault against China’s “Made in China 2025” initiative. It’s an attempt, above all, to punish past Chinese intellectual property theft by preventing Chinese firms from investing in or receiving U.S. technology. Some observers say this may have the effect of pushing Chinese tech out of its traditional medical and industrial wheelhouse into financial products, like cryptocurrency.
The Asian crypto story isn’t wholly about China, either. Korea appears to be loosening its restrictions on initial coin offerings, and the Korean market remains an enthusiastic investor in cryptocurrency as a whole. If the market is to recover before 2019, some observers say, Asian investment and possibly Asian tech will lead it.
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While cryptocurrency prices were suffering and the U.S. regulatory situation remained unsettled, a slew of companies outright banned cryptocurrency advertising on their platforms. Facebook exemplified this practice, and it really couldn’t have come at a worse time for the market. By blocking advertising on widely used technology portals, these companies choked off potential new investment at a time when the market needed it the most.
However, Facebook has announced that it is reversing its cryptocurrency advertising ban. This could potentially be big news for both adoption and new alternative coin projects. At its core, Facebook is an advertising platform. It just so happens that the name-plate product Facebook advertises is its users. However, with that kind of widespread access, cryptocurrency may just get the exposure it needs to spark a new round of common-man investment.
Big Money Comes to Town
Facebook likely revised its ad policy in response to more crypto scrutiny from the U.S. government. Anti-authoritarian though crypto may be, additional tax and regulatory clarity from all world governments – but most importantly the U.S. – are good things for the market as a whole. This is due to institutional investors. By their very nature, institutional investment firms are conservative. They have to be, because they’re not vehicles for speculation; they’re slow-growth funds for pensions, 401ks, major investment banks, and the like.
Cryptocurrency was previously a game for the reckless. The gains were potentially huge, but so were the losses. And there really wasn’t a guarantee that those gains wouldn’t be taxed to oblivion or – even worse – somehow declared illegal or invalid under U.S. law. However, with increased clarity on the U.S.’ regulatory stance, the waters have cleared and institutional investors are already dipping in their toes. This kind of massive liquidity injection could produce a tidy feedback loop. More big money in the game reduces crypto’s trademark volatility, attracting even more institutional money, which reduces volatility, and so on and so forth.
It’s dangerous to use a crystal ball anywhere near the cryptocurrency market, but it seems likely that Asian investment, grudging Silicon Valley acceptance, and the emergence of big institutional investors will lead Bitcoin and its alternative coin horde out of this bear market. Once the bear is back in the den, moreover, it’s possible that the December highs will return. There was nothing structurally wrong, after all, with December’s prices – it was just that they appeared too quickly. In the next big bull run, December’s highs might be viewed as a starting platform of sorts for even bigger – but more sustainable – gains.