Investors who had the nerve and wherewithal to invest in cryptocurrencies early in 2017 and hold throughout the year were probably handsomely rewarded. Between the beginning and end of 2017, the aggregate cryptocurrency market cap gained almost $600 billion, which works out to an increase in value of more than 3,300%. For a single asset class, it might just be the greatest 12-month return we will see in our lifetimes.
Unfortunately, 2018 hasn't looked anything like the previous record-shattering year. After hitting an all-time market cap high of $835 billion on Jan. 7, cryptocurrencies pushed to lows that hadn't been seen since around Thanksgiving on March 17 ($274 billion). But it's not the drop itself that's necessarily the most attention-grabbing point. Instead, it's what's leading the crypto market cap significantly lower.
Don't blame bitcoin for this recent decline
Most folks would probably assume bitcoin is to blame. After all, bitcoin is the largest virtual coin by market cap, and frankly it's the only one most of the public has probably heard about. While bitcoin has indeed performed poorly, it's not been the driving force behind the recent collapse in crypto prices. That credit belongs to everything not named bitcoin.
You see, the fourth quarter of the previous year absolutely belonged to cryptocurrencies not named bitcoin. Having seen bitcoin tokens explode from less than $0.01 to $10,000 per token in under eight years had speculators throwing darts at dozens of virtual currencies in 2017, grasping for straws at what might be "the next bitcoin." As a result, many of bitcoin's chief rivals ran circles around it last year. Ethereum, which is the second-largest cryptocurrency by market cap, increased in value by 9,383% in 2017, while Ripple and Litecoin, two other extremely popular digital currencies, surged by 35,564% and 5,260%, respectively. Meanwhile, bitcoin rose 1,364%.
This year has seen a complete reversal of the fourth-quarter 2017 trend. After hitting a high of $1,432 per Ether token on Jan. 13, Ethereum has pushed as low as $460, representing a loss in value of 68%. Ripple, which was unstoppable last year and hit an all-time high of $3.84 per XRP token on Jan. 3, has since seen its coin trade as low as $0.55 -- a decline of 86%. Even Litecoin, which in some circles is viewed as bitcoin's biggest rival, has plummeted from a peak of $375 on Dec. 19 to as low as $107 in early February.
Comparatively, bitcoin, which made up as little as 33% of the aggregate cryptocurrency market cap in mid-January, now comprises 44.4% of the crypto market cap, according to CoinMarketCap.com. That's close to a three-month high. In short, even though bitcoin is falling, it's dropping far less than its peers.
Two likely reasons bitcoin's biggest peers are plunging
That prompts the question: What the heck is wrong with Ethereum, Ripple, and Litecoin?
Taking a broader look at bitcoin's biggest rivals, two factors stand out as being responsible for their considerable declines in recent months.
1. A low barrier to entry
First, there's the simple fact that competition within the digital currency and blockchain space has exploded. Blockchain is the digital, distributed, and decentralized ledger often underpinning cryptocurrencies that's responsible for recording all transactions without the need for a financial intermediary, like a bank.
Last summer, there were around 900 virtual currencies that investors could buy. As of March 17, there were more than 1,650, with nearly all of them accompanied by their very own proprietary blockchain technology.
Were this not competition enough, brand-name companies have been working on developing their own blockchain technologies, some of which work independently of a virtual currency. For example, IBM (NYSE:IBM) is developing blockchain solutions for the financial services industry, as well as non-currency applications. In October 2017, IBM partnered with Stellar to use its Lumens coin as a financial intermediary in cross-border transactions in the South Pacific region processed on IBM's blockchain platform. Also, IBM and shipping giant A.P. Moller-Maersk recently announced their intention to create a separate joint venture that'll focus on developing shipping-based blockchain solutions. Such solutions could allow for real-time tracking of shipped products, as well as expedite approvals by eliminating paper from the equation.
In other words, growing competition from other cryptocurrencies and brand-name companies as a result of the low barrier to entry in developing and deploying blockchain and virtual coins is making life difficult.
2. The proof-of-concept conundrum
The other issue appears to be the proof-of-concept Catch-22 that practically every cryptocurrency is currently stuck in.
On the surface, Ethereum, Ripple, and Litecoin have done a really good job of brandling their blockchain technology or tokens, and the result has been countless partnerships. The Enterprise Ethereum Alliance had 200 member organizations as of October testing a version of Ethereum's blockchain across a variety of industries. Meanwhile, Ripple landed five brand-name financial partners in under two years' time, and Litecoin's average daily transactions have been steadily climbing since founder Charlie Lee announced he'd be working full-time to further Litecoin as a medium of exchange for goods and services.
But the underlying problem for most cryptocurrencies is that their platforms are being tested in small-scale projects and demos and not in large-scale, real-world scenarios. Enterprises simply don't feel comfortable yet with the idea of switching to blockchain platforms because they haven't been proven on a large scale. Yet, they'll never be proven on a large scale until a handful of enterprises gives blockchain a chance. This Catch-22 is precisely why cryptocurrency valuations have been deflating. If businesses don't move beyond this proof-of-concept conundrum, it's possible we could see Ethereum, Ripple, and Litecoin fall further, despite each offering unique advantages over bitcoin.
Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool is short shares of IBM, but has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.