Cryptocurrencies burst onto the scene in 2017 in a big way. After beginning the year with a combined market cap of less than $18 billion, the aggregate virtual currency market cap soared to $613 billion by year's end. Even taking into account the hundreds of new cryptocurrencies that debuted in 2017, the organic growth in crypto valuations was unprecedented for any asset class throughout history.
The tide turns on cryptocurrencies in 2018
Of course, the road has been a bit bumpier in 2018. Since hitting an all-time high during the first week of January, the combined cryptocurrency market cap has fallen by as much as 70%. What had seemed like a surefire win for investors has now turned into an asset class with a plethora of risks.
For example, blockchain technology has been the primary catalyst leading digital currencies higher. Blockchain is the digital, distributed, and decentralized ledger responsible for logging and processing transactions without the need for a financial intermediary, such as a bank. In addition, blockchain can transparently and immutably (i.e., in an unchanging manner) log data for non-currency uses, such as in tracking supply chain goods in real time. Blockchain's multiple potential uses have excited investors.
However, blockchain has also hit a major speed bump: the proof-of-concept conundrum. In numerous demos and small-scale projects, blockchain has performed well. But these defined tests aren't allowing blockchain to operate without its proverbial training wheels. No big businesses are going to be willing to give blockchain a chance until it demonstrates its ability to scale -- and blockchain can't demonstrate its ability to scale until big businesses give it a chance. It's a conundrum that could slow blockchain's uptake, as well as deflate investors' expectations for the technology.
Another example of a positive turning into a negative is medium-of-exchange tokens like bitcoin. Investors have pretty steadily pumped up the value of bitcoin since 2011, presuming that consumers will jump at the opportunity to use digital currencies like bitcoin to purchase goods and services. Since bitcoin can, theoretically, speed up the validation and settlement of transmittances relative to traditional banking networks, the assumption was that bitcoin could challenge these traditional networks.
Unfortunately, this hasn't been the case. Even though bitcoin has more merchants willing to accept it as a form of payment than any other cryptocurrency, it's still a nascent player. The issue is, there's no purpose pushing consumers to use bitcoin as a medium of exchange. Bitcoin transactions aren't particularly convenient, nor are they accepted by most traditional retailers. Without a well-defined purpose, selling bitcoin to the public as a better means of transmitting money from one party to another could prove difficult.
Here are 1.1 billion more reasons to avoid cryptocurrencies
The bad news is that the speed bumps just keep growing in size when it comes to digital currencies. According to a newly released analysis conducted by Carbon Black, it was determined that a whopping $1.1 billion worth of virtual currencies have been stolen by cybercriminals since the beginning of the year.
In particular, hackers seemed to thrive off of privacy coin Monero, which accounted for 44% of the aforementioned $1.1 billion in thefts. Bitcoin and Ethereum, which are the respective largest and second-largest cryptocurrencies by market cap, accounted for 10% and 11% of the $1.1 billion. Monero is a particularly attractive target given that privacy coins are designed to obfuscate the parties that are sending and receiving funds, as well as the amount being sent. This makes tracking down stolen Monero tokens (known as XMR) practically impossible.
However, the bigger issue is the fact that digital currencies are fallible. Proprietary blockchain technology, which underlies practically every major cryptocurrency, is supposed to be designed in such a way that any altered data or security breaches are easily identifiable by members of a network. But since we're talking about a completely digital currency, hacking can and does happen. In effect, Carbon Black's study suggests that cryptocurrencies aren't as secure as traditional bank accounts.
As noted by CNBC in an interview with Carbon Black Security strategist Rick McElroy:
The necessary malware, which McElroy said even occasionally comes with customer service, costs an average of $224 and can be priced as low as $1.04. That marketplace has emerged as a $6.7 million economy, according to the study.
What's more, the Securities and Exchange Commission (SEC) has cautioned on numerous occasions that, without regulation, there's little it can do to protect investors. Since many cryptocurrency transactions occur beyond the borders of the U.S., the SEC's jurisdiction and ability to recover stolen crypto funds is limited.
In other words, even casual investors have 1.1 billion reasons to avoid investing in cryptocurrencies. We also have 1.1 billion reasons and counting why regulation is necessary if this burgeoning asset class is to be trusted by casual consumers, investors, and by Wall Street. Though this would mean abandoning the anonymity that's made cryptocurrencies attractive up to this point, it'll be a step in the right direction to validating tokens like bitcoin and Ethereum.