Last year, cryptocurrencies simply couldn't be stopped. In just 12 months, the combined value of all virtual currencies soared from $17.7 billion to end the year at $613 billion -- an increase in value of more than 3,300%. These are gains that would normally take traditional equities, like the stock market, decades to generate for investors.

But 2018 has been a different story. The balloon has deflated significantly, and over the weekend, the aggregate value of all cryptocurrencies pushed as low as $235 billion on an intraday basis, according to CoinMarketCap.com. Not only does this represent a more than 70% decline from the peak of $835 billion hit during the first week of January 2018, it's also the lowest combined value for the roughly 1,600 tradable cryptocurrencies since the third week of November, seven months ago.

What's wrong with this burgeoning asset class? Chances are, it's some combination of the following five factors.

A person holding a glowing golden lock that's surrounded by latticework representative of blockchain technology.

Image source: Getty Images.

1. The proof-of-concept conundrum rears its head

Arguably, the biggest bright spot of the cryptocurrency revolution has been the emergence of blockchain technology, blockchain being the digital, distributed, and decentralized ledger that underlies most cryptocurrencies and is responsible for processing monetary transactions without the need for financial intermediary, and/or logging data in a transparent and immutable manner. With currency and non-currency applications, some folks expect blockchain to transform the landscape in which we move money and monitor supply chains, to name a few advantages.

However, blockchain has an almost insurmountable hurdle it'll need to overcome: the proof-of-concept conundrum. In numerous small-scale tests and demos by global organizations and enterprises, blockchain has performed as expected. But none of these organizations or businesses have been willing to take the training wheels off of blockchain, so to speak. Businesses won't turn to blockchain just yet because it's an untested technology that hasn't demonstrated its ability to scale. Unfortunately, the only way it can demonstrate its ability to scale is if businesses give it a chance. We call that a Catch-22, and it's liable to keep blockchain from being a difference-maker anytime soon.

A plunging red chart line overlying a physical yellow bitcoin that's surrounded by circuitry and binary code.

Image source: Getty Images.

2. There's no defined purpose for most virtual currencies

Another issue investors are likely running into is that most cryptocurrencies lack a purpose. By this I mean there's no catalyst or need for consumers or enterprises to switch to digital currencies, meaning traditional forms of remittances are liable to remain dominant for the foreseeable future.

For example, bitcoin may be the largest cryptocurrency by market cap, but its coin doesn't have a heck of a lot of utility. Unlike most digital currencies, which are focused on their blockchain, bitcoin is angled as more of a medium-of-exchange coin. In other words, the hope is that consumers will abandon using cash and credit cards in favor of buying their goods and services with bitcoin.

The question is: Why would anyone switch? And that's my point -- there is no good reason to at the moment. With the exception of bitcoin's utility as an intermediary currency that sometimes needs to be purchased in order to buy less popular cryptocurrencies on decentralized exchanges, there's very little reason for consumers or businesses to own or use bitcoin. Without genuine utility, virtual currencies are unlikely to gain long-term traction. 

A hacker with black gloves typing on a keyboard in with a dark background.

Image source: Getty Images.

3. Crypto thefts are undermining the long-term safety of digital currencies and blockchain technology

Next, cryptocurrencies are potentially taking it on the chin as a result of ongoing hacks and theft. A recently released analysis from Carbon Black found that, in just over five months, $1.1 billion worth of virtual currency had been stolen since the year began. In particular, 44% of these thefts were targeted at privacy coin Monero, which is designed to obfuscate the sender and receiver of funds, as well as the amount being sent. While a great tool for those who crave privacy, it makes tracking down stolen funds almost impossible.

The implications of these hacks are twofold. First, it demonstrates that blockchain technology and crypto networks aren't nearly as impervious as once imagined. Until additional safety precautions are taken, it could be difficult to gain the trust of Wall Street and retail investors.

The other implication here is that things aren't necessarily going to get better anytime soon. A recent decision by the Securities and Exchange Commission (SEC) not to label bitcoin and Ether as securities leaves investors hung out to dry if fraud does occur. While I understand the SEC's argument that these networks are sufficiently decentralized, and therefore don't need to be labeled as securities, not labeling these popular digital currencies as securities means the SEC will have little recourse to retrieve your funds if they're stolen. 

Multiple cryptocurrency symbols coming out of a smartphone that's surrounded by latticework representative of blockchain technology.

Image source: Getty Images.

4. There's hardly any perceived differentiation

A possible fourth reason we've witnessed the floor being pulled out from underneath cryptocurrencies is the fact that diversification doesn't really work. No matter what sort of mixed basket of digital currencies you purchase, there's a really good chance that your crypto holdings are going to mirror the movements of bitcoin.

Why do nearly all digital currencies move in unison? For starters, there are too many of them. With roughly 1,600 virtual currencies to invest in, investors are unable to get a good understanding of how one cryptocurrency differs from another. This lack of differentiation makes it difficult for digital currencies to move opposite of bitcoin.

There are also no traditional fundamental metrics investors can use to determine whether a cryptocurrency is fairly valued. Whereas you can look at income statements, balance sheets, and operating results for publicly traded stocks, all you get with cryptocurrencies are promises via a white paper, and perhaps the processing speed of the network. Unfortunately, these tell investors nothing about the long-term staying power of digital currencies.

Institutional investors actively trading at their desks.

Image source: Getty Images.

5. Institutional investors are making their presence known

Last, but not least, part of the blame might go to institutional investors who've mostly stayed on the sidelines until recently.

You see, Wall Street has next to no desire to put its money to work on decentralized cryptocurrency exchanges for many of the issues described above, including the possibility of theft or fraud. That's left retail investors to run the show. These retail investors often don't have the capital needed to bet against equities (a process known as short-selling, which requires borrowing money from a brokerage), creating a buy-side bias with cryptocurrencies that kept pushing them higher.

But beginning in December, which is, interestingly, when bitcoin's token hit its peak, the CME Group and CBOE Global Markets both listed bitcoin futures contracts on their platforms for trading. Because each CBOE and CME contract is for a respective one and five bitcoin (or around $6,000 and $30,000), these instruments are typically too pricey for retail investors and allow institutional investors to control trading. These institutions and their skepticism have likely been responsible for pressuring bitcoin and, with a noted lack of differentiation, dragging down everything else along with it.

With so many challenges ahead, even lower lows are a real possibility for cryptocurrencies.

Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends CME Group, but has no position in any cryptocurrencies mentioned. The Motley Fool recommends Cboe Global Markets. The Motley Fool has a disclosure policy.