Last year was a true coming-out party for the cryptocurrency craze. In a 12-month span, we witnessed the combined market cap of all virtual currencies soar from $17.7 billion to $613 billion, which represents an increase in value of more than 3,300%. For those of you keeping score at home, it was very likely the single greatest year we've ever witnessed for any asset class, and chances are, we may never see anything like it again -- at least during our lifetime.
However, this year has been markedly different for digital currencies. After making a brief run to an all-time high of $835 billion in market cap on Jan. 7, 2018, the wheels fell off the wagon, so to speak. Over the course of the next three months, the aggregate cryptocurrency market cap would plunge 70%, dropping briefly below $250 billion. Virtually no digital tokens were spared, with some of the largest cryptocurrencies -- those with market caps exceeding $1 billion -- being hit with losses of nearly 90%.
These virtual currencies rocketed higher by at least 100% in two weeks
Volatility is certainly nothing new for cryptocurrency investors who, over the past six months, have witnessed wild swings in the value of digital tokens. That volatility has reared its head once again over the two-week period spanning April 6 through April 20. Over this stretch, the aggregate market cap of virtual currencies soared from a low of $247 billion to a peak of $395 billion -- a gain of 60%.
Yet, some of the largest cryptocurrencies saw their values rise even more. Here's a list of some of the top-performing cryptocurrencies over this two-week stretch, from their trough on April 6 to their peak on April 20, according to CoinMarketCap.com:
- IOTA: up 115%
- Cardano: up 113%
- Stellar: up 111%
- Ripple: up 102%
- EOS: up 101%
Notably absent on this list is bitcoin, the world's largest virtual currency by market cap. While still exceptionally volatile compared to traditional equities, bitcoin tends to vacillate far less than its peers. Bitcoin is up just 35% over this two-week period, suggesting that other virtual currencies have been primarily responsible for this rally.
Three reasons behind the latest surge in cryptocurrencies
Why have digital currencies suddenly caught fire once again? While there are countless rumors, my belief is that it's a combination of three factors.
1. Blockchain is finally getting some real-world action
First, we're finally beginning to witness the real-world application of blockchain technology. For those of you who are unfamiliar, blockchain is the digital, distributed, and decentralized ledger that underpins most virtual currencies and is responsible for recording all transactions without the need for a financial intermediary, like a bank. In planer terms, it's a new way of transmitting funds without using traditional banking networks, as well as storing data in a transparent manner without the ability to alter that data.
Blockchain is where the real long-term value of cryptocurrencies lies -- but it's also their greatest source of concern. You see, while most small-scale projects and demos regarding proprietary blockchain networks have been successful, virtually no brand-name businesses have been willing to test blockchain in real-world scenarios. The proof-of-concept conundrum, as I refer to it, describes the paradox that businesses are unwilling to commit to a technology that hasn't proven its ability to scale, yet at the same time, can't prove its ability to scale unless some businesses are willing to commit to it.
In recent days, a number of intriguing blockchain projects have gone live. For example, on April 19, IBM (IBM -2.32%) announced that Batavia, a blockchain-based trade finance platform developed in collaboration with the Bank of Montreal, Commerzbank, and other financial institutions, successfully completed initial transactions, which involved sending cars from Germany to Spain, and furniture production textiles from Austria to Spain.
Of course, this represents just one of a handful of projects IBM's blockchain division is working on. IBM is behind a South Pacific remittance project to expedite validation and settlement times across 12 major banks in the South Pacific. In fact, Stellar's Lumen's coin is being used as the intermediary currency to expedite these cross-border transactions. IBM also announced a joint-venture spinoff with shipping giant A.P. Moller-Maersk earlier this year that'll focus on developing blockchain solutions for the shipping industry.
In short, if the proof-of-concept conundrum can be overcome, a big weight could be lifted off of the shoulders of crypto skeptics.
2. The stock market stabilized
Next, the stock market appears to have played a role in pushing virtual currency valuations higher.
Last year, there was the belief that digital tokens could act as an alternative to the stock market, or even replace assets like gold as the go-to store of value during fearful times. It certainly wasn't difficult to imagine this being the case, with cryptocurrency market caps soaring that aforementioned more than 3,300% in 2017.
But something interesting happened earlier this year. When the stock market ran into a brick wall and entered correction territory for the first time in two years in February, virtual currencies sank right beside traditional equities. In other words, the myth that cryptocurrencies act as an alternative investment option to stocks collapsed on itself. We also watched as gold modestly rallied amid stock market turbulence and a declining crypto market.
While I wouldn't go so far as to call cryptocurrencies and the stock market linked at the hip in any way, I would suggest that the two move somewhat in step with one another. With the stock market having found a bottom, at least for the time being, virtual currency investors seem to be more than happy to step in and push these tokens higher once again.
3. The fickle retail investor is happy, again
Last, but not least, the emotions of retail investors have again turned on a dime.
The crypto market is mostly unregulated, but that can change depending on the country in question. It's also a market where buying and selling pretty much happens exclusively on decentralized cryptocurrency exchanges. Wall Street and institutional investors simply have no desire to put their money to work in loosely regulated, decentralized exchanges that are often located overseas. This means the bulk of buying and selling of virtual tokens is done by retail investors.
The thing about the retail investor is that he or she is considerably more prone to invest based on emotion rather than logic, at least when compared to institutional investors. This has the tendency to increase volatility and push cryptocurrencies up or down very rapidly at times. It could be a primary reason behind the more than 100% gains in the aforementioned five virtual currencies in a 14-day span.
There's also a natural incentive for retail investors to bet on upside in cryptocurrencies rather than downside. Betting against virtual currencies, or short-selling cryptocurrencies, is either not something currently supported on decentralized crypto exchanges, or a pricy venture that most retail investors simply couldn't afford. This creates an incentive to bet on rising cryptocurrency prices. If enough retail investors succumb to this bias, prices can head notably higher.
It's unclear what's next for virtual currency investors, but one thing's for sure: Volatility is here to stay.