Bitcoin and other major cryptocurrencies are down considerably in 2018.
In this clip, Industry Focus: Financials host Michael Douglass and cryptocurrency specialist Matt Frankel discuss the news that's been weighing on the market. They point out that one major social media network has banned advertisements for initial coin offerings and cryptocurrencies, spooking investors. Additionally, there are concerns about international regulatory authorities stepping in.
A full transcript follows the video.
This video was recorded on Feb. 2, 2018.
Michael Douglass: Before we get into things, I should note, because it might actually matter for some of the numbers we're talking about, we're actually pre-recording this episode on Friday, Feb. 2. We're talking about cryptocurrency prices as they are as of when we're recording, which, of course, if you know anything about cryptocurrency volatility, could be wildly out of date by Monday. [laughs] So, any numbers we mention, just keep that in mind.
Let's head to our headlines story. Bitcoin plunged below $8,000 this morning, bottoming out around $7,900. It's actually up to about $8,600 as of right now. Still, it's down over 30% this year. And it's not the only one. A number of other cryptocurrencies are, too. Ripple is down around 50% year to date. Bitcoin Cash, upper 40s, around 50%. And a number of others are really underperforming after a lot of investor excitement in January. So, let's hop into the why.
Unlike a fair amount of the time when there's volatility around things and you're like, "Why is this?" there are actually some legitimate reasons, and some legitimate concerns, I think, for people who are really interested in cryptocurrencies. I think for me, the most salient one was Facebook banning advertisements related to cryptocurrencies and initial coin offerings.
Matt Frankel: Yeah. I think that's definitely going to hit what I would call the lower, less mainstream end of the market. Not necessarily bitcoin and the big ones. First of all, the fact that you had to give that disclaimer kind of tells the audience everything they need to know about bitcoin volatility.
Douglass: [laughs] Yes.
Frankel: A little side note: When I wrote the notes for this episode, about two hours ago, bitcoin had rebounded to a little over $9,100, and now it's about $8,700, in just a little over an hour. This is some pretty big volatility, in addition to declines. Declines are one thing, but Ripple, for example, doubled the first two days of the year, and then lost 50% from its Jan. 1 price. So, these are some big swings we're talking about.
Douglass: Yes. And I'll say on the Facebook piece, it's not necessarily the most important piece of news, particularly for, as you noted, these big, major cryptocurrencies, ones that we all heard of like bitcoin and Ripple. But my feed had become completely inundated with advertisements around cryptocurrencies. For whatever reason, the algorithms had decided that I was the person who was going to buy into all this stuff. So, I just have to say, I'm much happier with the advertisements I'm being served today, even though I'm still not acting on them, any of them, just to be clear.
Frankel: That's probably a good idea. [laughs] Another thing that could affect that end of the market is, the SEC, which has been warning investors for months about these initial coin offerings and smaller cryptocurrencies, they recently stepped in and put a stop to what would probably be the biggest initial coin offering so far. Something called Arise Bank -- it's a bank based in Dallas -- was about to do an ICO. They raised $600 million pretty much on false pretenses, it seems like. They told investors that they had acquired an FDIC insured bank, which wasn't true. So that gave investors some jitters, understandably.
The other big theme going on this year is regulatory concerns. Not so much here in America. The government here has been pretty straightforward about what they think of cryptocurrencies -- they consider them capital assets, exchanges have to follow certain rules if they want to sell them. In general, we know what's what. South Korea has been a big story. They're, I think, the No. 3 bitcoin market in the world, behind Japan and us. South Korea, this saga has been going on all year. At first, they were saying they're going to try to ban cryptocurrency trading altogether. Then they backed off from that. Now they're just planning to take some steps to prevent money laundering and things like that. Making people trade cryptocurrencies under their real names is the big one they just implemented. And India, just recently -- which is another pretty big bitcoin market, about 10% of crypto volume comes from India -- just announced similar things, that bitcoin is all for money launderers and they're going to do what they can to keep it out of their system, etc. So these regulatory fears are really causing investors to take a step back. The price of bitcoin, the speculative interest, is not just in America. We're actually less than half of it. It's all these other markets around the world that we don't know what's their governments are going to do yet that is spooking investors.
Douglass: The other piece that's worth mentioning as well, I would argue it's been more of a story in 2016 and 2017 because we're only a month into 2018, but there was a big crypto exchange hack as well, recently. Of course, hacking has been an issue that we've seen -- there was the OPM hack, there were hacks with a variety of different health insurance companies and hospitals, and Yahoo, there's been a lot of hacking going on. And the biggest crypto exchange hack recently occurred, about $600 million worth of NEM coins were taken. That also makes a big difference.
Frankel: And it's kind of worth noting with that that they weren't really following protocol. Generally, when you have that much of any cryptocurrency, the thing you're supposed to do is not store it online, and theirs were in what's called a hot wallet, which is a wallet that's linked to the internet. For example, Coinbase's billions of dollars in bitcoin are not stored online, so they're not really vulnerable to hacking. But in this case, the coins were, and somebody got smart and took them.
Douglass: Yeah. Bottom line: When approaching cryptocurrencies, I think in general -- and this is personally my stance on investing in currencies in general -- is that it's best to steer clear, particularly when they are this volatile. I tend to favor investments where there's a business that I can theoretically, at least, understand, and that business is generating profits, or hopefully, at least, revenue, that I can then model out and figure out what the opportunity looks like. Generally speaking, I think, if you do believe that there's going to be a lot of money to be made in cryptocurrencies, there's plenty of time for that to happen when a lot of these bigger-picture questions about them have been better sorted out.
Frankel: I completely agree. I bought some bitcoin in the past, just small amounts just to kind of learn how it worked, but I couldn't see myself putting more than $20 or $30 into it at a time. It just, it could be worth half of what it is today, or it could be worth double within a day. So, it's buyer beware.
Matthew Frankel has no position in any of the stocks mentioned. Michael Douglass owns shares of FB. The Motley Fool owns shares of and recommends FB. The Motley Fool has the following options: short March 2018 $200 calls on FB and long March 2018 $170 puts on FB. The Motley Fool has a disclosure policy.