In 2017, the cryptocurrency market was virtually unstoppable. After beginning the year with a relatively small aggregate market cap of $17.7 billion, the combined value of digital currencies soared by almost $600 billion, pushing to $613 billion by year's end, an increase of more than 3,300%. Chances are decent that investors may never see such impressive one-year gains from an asset class ever again.
However, 2018 has presented some hurdles for cryptocurrencies. Regulatory concerns out of South Korea and China earlier this year wound up facilitating a decline in the aggregate virtual currency market cap from an all-time high of $835 billion to just $276 billion at its trough. In essence, the crypto market lost two-thirds of its value in roughly one month's time.
Facebook and Google kick cryptocurrency-related ads to the curb
Those challenges have continued beyond just concerns over increased regulation abroad. Over the past month and a half, two major advertising kingpins have announced that they would stop allowing cryptocurrency and initial coin offering (ICO) ads over their platforms. (An ICO is very much like an initial public offering for common stock, except it's for digital tokens.)
At the end of January, the largest social media network in the world announced that it would be banning all cryptocurrency and ICO ads. In the announcement, Facebook (NASDAQ:FB) product management director Rob Leathern said, "We've created a new policy that prohibits ads that promote financial products and services that are frequently associated with misleading or deceptive promotional practices, such as binary options, initial coin offerings and cryptocurrency." Considering that Facebook owns four of the top seven social media platforms by total users -- Facebook, Facebook Messenger, Instagram, and WhatsApp -- this move to ban crypto ads was viewed as a major blow.
However, it wouldn't be the last blow for the crypto space. On March 14, Alphabet subsidiary (NASDAQ:GOOG) (NASDAQ:GOOGL) Google also announced that it would be doing away with crypto-related ads, and anything concerning ICOs, crypto wallets, and virtual currency trading advice, by June 2018. Said Scott Spencer, Google's director of sustainable ads, in an interview with CNBC: "We don't have a crystal ball to know where the future is going to go with cryptocurrencies, but we've seen enough consumer harm or potential for consumer harm that it's an area that we want to approach with extreme caution."
As highlighted in Google's new Financial Services advertising policy, it'll be disallowing "[b]inary options and synonymous products" and "[c]ryptocurrencies and related content (including but not limited to initial coin offerings, cryptocurrency exchanges, cryptocurrency wallets, and cryptocurrency related trading advice)."
What this all means
While the news of Facebook and Alphabet taking a hard-line stance on cryptocurrencies might come as a bit of a surprise, and is mostly being construed as bad news, it's a bit of a double-edged sword when all is said and done.
On one hand, banning digital currency advertisements makes perfect sense given that they're mostly unregulated and could cause financial loss to uninformed individuals who are lured in by advertisements promising big returns. If we've learned anything so far this year, it's that cryptocurrencies can most certainly head lower. In fact, most ICOs often fail to raise enough cash or interest to become viable long-term assets.
We also know that the cryptocurrency market relies on new investors to help drive market caps even higher. It's a market dominated by retail investors, with institutional investors sticking to the sidelines and being unwilling to invest in decentralized exchanges. The loss of billions of impressions from Facebook's and Google's platforms may very well adversely impact crypto valuations in the future by reducing new investment.
Then again, the actions taken by Facebook and Google also demonstrate that cryptocurrencies are becoming a more validated asset class. In an odd twist, an increasing amount of regulation -- even including the banning of crypto-related advertisements -- could help form a tangible foundation where these assets can gain the trust of investors. While most virtual currency investors fear regulation, as anonymity is what's made bitcoin and other digital currencies so attractive, added regulation of any form is actually a long-term positive for the cryptocurrency movement.
What we don't know is what's next for the cryptocurrency space. It's possible we could see other major advertising players follow in Facebook's or Google's footsteps, or even see the Securities and Exchange Commission ramp up regulations. Either way, virtual currency investors shouldn't fear these actions taken by Facebook and Google. Instead, they should cheer them, as they're a means to help validate this burgeoning asset class and weed out digital tokens and blockchain projects that aren't operating in the best interests of their members.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook, but has no position in any cryptocurrencies. The Motley Fool has a disclosure policy.