The cryptocurrency market has truly been something for investors and bystanders to marvel. Whereas a great year in traditional equities might entail a gain in value of around 10% (stocks historically average 7% a year, inclusive of dividend reinvestment), the aggregate market cap of all cryptocurrencies increased by more than 3,300% last year. Sure, this included the introduction of new coins, but it also was a function of well over a dozen virtual coins surging by more than 10,000% in 2017.
During a roughly 53-week stretch between Dec. 31, 2016, and Jan. 7, 2018, cryptocurrency valuations catapulted from $17.7 billion to as high as $835 billion, representing an increase in value of more than 4,500%. By comparison, it's taken the broad-based S&P 500 multiple decades to deliver similar returns.
Putting the cryptocurrency correction into perspective
However, big gains also tend to come with big corrections. Between the cryptocurrency markets' Jan. 7 peak, and its trough on Jan. 17 ($414.9 billion), approximately $420 billion in market cap was lost. In effect, half of the crypto market cap was wiped away over a span of 10 days.
Let's put this into even more perspective. Here were the high- and low-water marks for four of the most popular virtual coins between Jan. 7 and Jan. 17, according to CoinMarketCap.com, along with the maximum percentage lost from peak in parenthesis:
- Bitcoin: $17,579.60 / $9,402.29 (46.5%)
- Ethereum: $1,432.88 / $780.92 (45.5%)
- Ripple: $3.49 / $0.8978 (74.3%)
- Litecoin: $305.53 / $141.01 (53.8%)
On a percentage basis, these are huge moves. Bitcoin, the world's most popular cryptocurrency, came close to losing half of its value, as did the second-largest cryptocurrency by market cap, Ethereum. Ripple, which has benefited from a two key blockchain partnerships with global banking institutions, practically lost three-quarters of its value from peak to trough. Litecoin followed suit with almost a 54% loss.
But the magnitude of these drops are even more revealing when we consider what sort of market cap was lost:
- Bitcoin: $137.5 billion
- Ethereum: $63.3 billion
- Ripple: $100.4 billion
- Litecoin: $9 billion
The market cap erased from bitcoin over a 10-day stretch is the same market cap for the entirety of NVIDIA (NASDAQ:NVDA), the graphics card developer and manufacturer that's played a critical role in fueling the drive of individuals and businesses to mine cryptocurrencies.
Meanwhile, Ripple's $100.4 billion tumble is higher than the market cap of financial investment firm Morgan Stanley. And Ethereum erasing $63.3 billion is akin to General Motors' market cap completely disappearing in 10 days.
Is this correction warranted? Probably so.
The big questions, of course, are why the correction occurred in the first place and whether it was warranted.
Though there are next to no certainties with virtual currencies, the move lower appears to be tied to four catalysts. This includes South Korea flip-flopping on a potential domestic cryptocurrency exchange crackdown, China getting stricter with virtual-currency trading, stop-loss orders triggering and creating a cascade to the downside, and retail investors wearing their emotions on their sleeves.
As for the second question, though I might be in the minority, my opinion is that this correction was most definitely warranted.
If we look at the primary catalysts for bitcoin, Ethereum, Ripple, and Litecoin, it's been the evolution of blockchain technology. Blockchain is the digital and decentralized ledger tethered to virtual coins that logs all transactions.
The possibilities with blockchain appear endless, at least for the time being. Its use is particularly attractive for financial service companies that currently deal with settlement times of up to three to five days on cross-border transactions. Blockchain resolves this by pushing settlement and validation times down to mere seconds in some cases, while also potentially lowering transaction fees by eliminating the middleman (banks usually act as a third-party in transactions).
However, blockchain technology is no lock to be accepted with open arms by enterprises. This is a technology that bitcoin brought into the limelight almost a decade ago, and it's taken that long just for it to be tested in small-scale projects. Plus, there aren't any guarantees that blockchain technology will be remotely compatible with current payment networks, which could require an expensive and time-consuming infrastructure overhaul should financial service companies jump aboard.
If history has proven anything, it's that investors are notorious for overestimating just how quickly new technology will be adopted. This isn't to say that blockchain technology can't be the game changer that everyone expects so much as to suggest that it's probably going to take longer for it to become a mainstream solution for big businesses. If that is indeed the case, then this recent correction in cryptocurrencies could be well warranted.