Last year, cryptocurrencies were nothing short of unstoppable. After beginning the year with a combined market cap of just $17.7 billion, the aggregate value of all cryptocurrencies catapulted to $613 billion by year's end. This better than 3,300% gain would have taken the broad-based S&P 500 decades to deliver.
The cryptocurrency swoon has arrived
This year, however, virtual currencies have been a volatile roller coaster. After hitting an all-time high of $835 billion on Jan. 7, the cryptocurrency market cap tumbled to more than a two-month low on Feb. 6 to $279 billion. That's a roughly 67% drop in value in just a matter of weeks.
There are a number of reasons why pessimists have come out of the woodwork to pile on digital currencies. Among them is a step-up in regulations surrounding bitcoin and other cryptocurrencies. For example, South Korea recently announced that it would be stepping up transparency requirements for folks who want to add funds into cryptocurrency accounts. New regulations require that banks identify their customers if their accounts are going to be linked to cryptocurrency exchanges. This pushback on anonymity is viewed as a potential blow to the privacy-coin movement, and it strikes against one of the primary lures of cryptocurrencies, in general.
Another issue is likely the lack of progress on the blockchain technology front. Blockchain is the digital, distributed, and decentralized ledger that underlies virtual currencies and is responsible for recording all transactions without the need for a financial intermediary. It's believed that blockchain could revolutionize the banking system by dramatically shortening transaction settlement times (especially cross-border transactions), and by lowering transaction fees. Since there is no banking involvement as a third party, that's one fewer mouth to feed, so to speak. Unfortunately, blockchain is only being examined in demos and small-scale projects after nearly a decade. It's enterprise-level acceptance is taking much longer than expected.
Cryptocurrencies have also, arguably, lacked individuality. They are intricately tied at the hip to bitcoin, which is the world's most valuable cryptocurrency, and the one most likely to be accepted by merchants worldwide. This lack of individuality has crippled other virtual coins as regulation surrounding bitcoin has ramped up.
This big banking announcement is a major disappointment for cryptocurrencies
But all of these issues might pale in comparison to the game-changing announcement made by three major banks this past week concerning cryptocurrencies.
According to a report from Bloomberg, Bank of America (BAC 1.38%), JPMorgan Chase (JPM 1.28%), and Citigroup (C 1.91%), which effectively account for a large swath of banking customers in the U.S., are disallowing their members from buying cryptocurrencies while using their bank-issued credit cards. The banks cited three concerns as the reasons behind putting the kibosh on crypto purchases with credit.
To begin with, they're concerned about cryptocurrency market volatility -- a point you'd have a hard time arguing against given a 3,300% move higher in 2017, and a 67% move lower over a roughly 30-day period.
Secondly, these banks are worried about emotional members buying more cryptocurrency than they can afford to pay back. Not only do banks not want to be saddled with owning digital currencies if the consumer can't meet their end of the repayment obligation, but a suddenly strong U.S. economy could portend a more aggressive rate-hike schedule from the Federal Reserve in the not-so-distant future. Higher interest rates would probably make it less likely that cryptocurrency purchases on bank-issued credit cards would be paid back in full.
Lastly, Bank of America, JPMorgan Chase, and Citigroup worry about the possibility of having hackers steal bank-issued credit cards and purchase cryptocurrencies like bitcoin with them. Not only are cryptocurrencies hard to track, but with quite a lot of transactions happening outside the confines of the United States, banks would have little chance of getting their money back.
And, as noted by Engadget, Bank of America, JPMorgan Chase, and Citigroup aren't the only large financial institutions to make such a move. Capital One Financial and Discover Financial Services also disallow their members from using bank-issued credit cards to buy cryptocurrencies.
Bitcoin's network isn't as vast as you might think
This unprecedented move by many of America's biggest banks highlights a growing issue with bitcoin. Namely, that it's reach may not be as wide as many people think.
Bitcoin is banned in around a half-dozen countries, and it faces considerable regulatory restrictions in others. In China, for instance, bitcoin isn't illegal, but it might as well be. Initial coin offerings and cryptocurrency exchanges are completely banned in China, and bitcoin miners are having their electricity usage scaled back. And as noted above, South Korea has implemented harsher regulations surrounding investor transparency.
Bitcoin's network has also been nothing short of sluggish. Despite offering to change the way peer-to-peer payments are performed, bitcoin's blockchain can only handle a maximum of seven transactions per second. At the moment, transactions are taking in excess of an hour to settle, and the average transaction cost is north of $28, putting them pretty much on par with the cost of a bank wire.
And now, bitcoin can't be purchased with some of the most commonly held bank-issued credit cards in consumers' wallets.
The warning signs surrounding bitcoin and cryptocurrencies are getting more pronounced by the minute, and investors would be wise to take heed and keep their distance.