Last year was a true coming-out party for the cryptocurrency market. After virtual currencies began the year with a combined market cap of less than $18 billion, their aggregate value soared almost $600 billion by year's end to $613 billion. That's a gain of more than 3,300%, and it's probably the greatest single year for an asset class that we'll ever see.

However, the current year hasn't brought the same jubilation for cryptocurrency investors. In fact, virtual currencies at one point shed 67% of their value, from peak to trough, in a matter of weeks. Some would suggest that this was simple profit-taking, and to some extent they may very well be correct. But the recent downdraft in digital currencies, which has been ongoing now for more than two months, may represent a loss of trust among retail investors that these virtual currencies and blockchain projects can deliver on their promises. Blockchain is the digital, distributed, and decentralized ledger that underlies most cryptocurrencies and is responsible for logging all transaction data without the need for a bank.

What needs to happen for Wall Street, investors, and even worldwide governments to take cryptocurrencies seriously? Let's take a look.

A judge's gavel surrounded by binary code.

Image source: Getty Images.

Regulation! Regulation! Regulation!

Though you might shudder at the thought of regulation in the crypto market, it's perhaps the one factor in the near term that could restore faith in virtual currencies. You see, quite a few investors bought into the early cryptocurrency craze on the notion of perceived anonymity. In other words, their transactions weren't being routed through traditional banking networks, and they didn't have to link their name to their virtual currency accounts. However, this anonymity and Wild West-nature of the crypto market is precisely why a number of investors today believe this to be nothing more than a passing fad. Regulation could change that.

To begin with, regulation itself provides validation. The more worldwide governments tighten cryptocurrency controls, the more virtual currencies become a burgeoning asset class. For example, South Korea announced in January that it would no longer allow investors to add funds to crypto exchanges from a domestically linked bank account unless they provided their name and other identifying information. South Korean regulators aren't trying to shut down digital currency markets so much as help validate their existence. 

We've also witnessed a step up in regulation from social media networks that've recently put their collective foots down on crypto and initial coin offering ads. Facebook (NASDAQ:FB) in January, Alphabet's Google by June, and, as rumored, Twitter are all saying goodbye to cryptocurrency-related advertisements. Rob Leathern, Facebook's product management director, had this to say in January: "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." 

On the surface, the actions taken by these social media titans seem harmful, as it'll substantially reduce daily impressions, which could slow or reverse money inflow into the cryptocurrency market. But it'll ultimately help form a foundation where investors become more informed, and allow information to be disseminated in an orderly fashion, rather than through mass-advertising, where claims can be difficult to validate. Regulation is a good thing, and it's a necessary step if cryptocurrencies are to be taken seriously.

Binary code and blockchain nodes surrounding a digital outline of the continents.

Image source: Getty Images.

Real-world application

Next, the cryptocurrency market needs to move past the proof-of-concept conundrum.

Over the past two years, we've seen a countless number of blockchain partnerships between digital currencies and brand-name businesses, while medium-of-exchange coins like bitcoin and Litecoin have been signing up plenty of new merchants. But in many of these instances, these projects being undertaken are small in scope and lack anything that resembles real-world scalability. If cryptocurrencies are to be trusted, we're going to need to see blockchain projects and virtual coin usage move beyond simple proof-of-concept testing and into real-world applications.

For instance, in November, the IOTA Foundation announced the beta launch of its Data Marketplace, which is a blockchain-based network that would allow companies to sell or share unused data. Considering most business data goes unused, this revolutionary blockchain idea was viewed as a possible game-changer -- even in its beta version. It also had over three dozen brand-name participants that were offering feedback during this beta period. However, as IOTA's market cap increased, the number of users on its network did as well, bogging things down for a period of time and slowing processing times to a crawl. In other words, when scaled, the IOTA network ran into some major hurdles.

In a broader sense, blockchain technology is caught in a vicious Catch-22. On one hand, it's demonstrated success in numerous small-scale and pilot projects. Nevertheless, businesses haven't been willing to replace their existing networks and use blockchain in a scaled scenario. The reason? A lack of real-world testing and proven scalability. Yet this scalability and real-world testing can't be proved if no businesses step forward to give this technology a chance. 

In addition, blockchain isn't a true fit for all industries, even in its non-currency form, and the cost to integrate or replace an existing network with blockchain could be enormous. But if we're to see cryptocurrencies and blockchain gain acceptance, we're going to need to see real-world applications of this technology.

Messy stacks of physical gold coins in front of a bar chart.

Image source: Getty Images.


Last, but not least, we'd need to see some serious consolidation in the cryptocurrency space, which, according to my Foolish colleague Matt Frankel, now tops 1,650 investable digital currencies.

I know what you might be thinking: "But there are thousands of publicly traded stocks, and the stock market seems to be operating efficiently." While that's true, you have to keep in mind that the stock market is regulated, and the virtual currency market mostly isn't. A majority of virtual currencies that have undertaken an initial coin offering haven't raised enough capital to be viable over the long term, and a number of others lack any regular trading volume.

Understand that the consolidation could take a few forms. It could mean removing the ability to invest in delisting cryptocurrencies that failed to raise adequate money during an initial coin offering, or it may even involve actual consolidation of blockchain projects. Either way, investors and enterprises need a consolidated crypto market to be able to properly analyze digital currencies for future investment.

When the cryptocurrency market is narrowed down to viable coins, tightly regulated, and is accepted by enterprises, then, and only then, will it be taken seriously.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.