In 2017, the cryptocurrency market was practically unstoppable. Over the course of the year, the combined market cap of all virtual currencies soared almost $600 billion, which in percentage terms, equates to more than 3,300%. It may very well go down as the most impressive 12-month return for an asset class we'll ever witness.
But this year has seen a major reversal. After peaking in market cap at $835 billion on Jan. 7, cryptocurrencies have plunged to less than $250 billion, representing a 70% collapse in value. Virtually no digital currencies have been spared, with some, such as Ripple, nearing losses of 90% over the past three months.
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However, volatility isn't the only thing that's reared its head in recent months. A number of pervasive cryptocurrency conundrums have taken hold, leading to growing levels of uncertainty, and even adversely impacting a select few publicly traded stocks. Here are three cryptocurrency conundrums that simply can't be ignored.
1. The proof-of-concept conundrum
If there's an issue that could be labeled as the biggest problem for cryptocurrencies, in my view, it'd be the proof-of-concept conundrum associated with blockchain technology.
For those unfamiliar, blockchain is the digital, distributed, and decentralized ledger responsible for recording transactions in a transparent manner without the need for a third party, such as a bank. In even plainer English, it's a way to transmit funds and log data without the need for traditional banking networks. Its entire evolution was based on the perception that the current banking system was failing consumers by taking up to five business days to process transactions, as well as by allowing banks to pilfer transaction fees by acting as a third party. Blockchain resolves this by processing payments considerably faster (potentially in real time), as well as by eliminating banks from the equation, thusly reducing transaction fees.
This probably sounds great on paper, and it's certainly attracted no shortage of enterprises that've been willing to test blockchain in demos and small-scale projects. The Enterprise Ethereum Alliance has gathered well over 250 organizations from around the globe to test a version of Ethereum's open-source blockchain in various industries and settings.
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Yet, one issue remains: real-world scalability. Even though we've observed plenty of successful blockchain demos and projects, none have allowed blockchain to be tested in a broader-scale, real-world scenario. More importantly, no brand-name companies have, as of yet, decided to go all-in on blockchain and replace their existing networks.
The conundrum is this: Enterprises won't switch to blockchain until it's proven its real-world scalability -- but there's no way to prove this scalability if no big businesses make the switch. Until there's some resolution to this catch-22, betting on blockchain remains a dangerous venture for investors.
2. The regulation conundrum
Another issue that might have cryptocurrency investors pulling their hair out is the regulation conundrum.
Since January, cryptocurrencies like bitcoin have taken it on the chin as certain countries have stepped up virtual-currency governance. As an example, in January, South Korea announced that banks would have to verify the identities of their members if their accounts were to be linked to cryptocurrency exchanges. In other words, if additional money was to be added, anonymity was no longer an option in South Korea.
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In the U.S., we've witnessed a similar push toward transparency. The Internal Revenue Service (IRS) won a court case against well-known crypto exchange Coinbase in November, requiring the exchange to hand over info on users who'd traded in excess of $20,000 in bitcoin between 2013 and 2015. Since only 800 to 900 tax filings annually over those years made note of capital gains, it's pretty evident the IRS is cracking down on virtual currency tax evasion. The passing of the Tax Cuts and Jobs Act, which eliminated like-kind exchanges, is further evidence of the United States' push to make the virtual currency landscape more transparent.
When cryptocurrencies were first pushed into the spotlight, it was their anonymity that drew investors to them. They were viewed as a libertarian's dream currency. But with regulation stepping up, many digital currencies have sold off.
The conundrum is this: In order for cryptocurrencies to be taken seriously, and for them to have a long-term future, there needs to a foundation of regulation. Yet, this regulation works against the very core principle that attracted investors to virtual currencies in the first place. Balancing the need for regulation and the desire for independence is going to be difficult.
3. The cryptocurrency mining conundrum
Finally, there's a real headscratcher that graphics card producers NVIDIA (NVDA +1.13%) and Advanced Micro Devices (AMD +0.19%) have to come to terms with regarding cryptocurrency mining.
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Cryptocurrency mining describes one of the more common processes by which blockchain transactions are verified. It involves people or businesses with high-powered computers competing against one another to be the first to solve complex mathematical equations that are the result of the encryption designed to protect those transactions from hackers. The first to solve these equations and validate a group of transactions, known as a block, is given a "block reward." This reward is paid out in the tokens of the cryptocurrency that's being mined, and it's how crypto miners make their money.
Not all virtual currencies are mineable, but bitcoin, Ethereum, Bitcoin Cash, and Litecoin, four of the five largest by market cap, are indeed mined. Mining is a highly intensive process since it uses a lot of electricity, as well as some serious hardware. For bitcoin, we're talking about specialized ASIC (application-specific integrated circuit) chips, with graphics processing units being used in other mineable cryptocurrencies.
Now, here's the conundrum: Graphics card prices have doubled, tripled, or even quadrupled as a result of demand for cryptocurrency mining. That's been a nice boon for NVIDIA and AMD, but it's really ticking off their core graphics card customers, who are either video-game enthusiasts or businessmen/businesswomen. NVIDIA and AMD have to decide whether they'll do nothing and let supply and demand dictate pricing, which could cause them to lose some of their core customers, or launch crypto-specific graphics cards for mining and lessen the recent surge in revenue they generated from the mining craze. It's really a no-win situation for either company.
