What an incredible difference six months has made.
At this time last year, cryptocurrencies were about to begin one heck of a six-month run higher. When the curtain closed on 2017, the combined market value of all cryptocurrencies had soared more than 3,300% to $613 billion. Mind you, it would have taken the stock market decades to deliver similar returns.
Cryptocurrencies have made a complete 180 in 2018
But things changed in early January. After hitting an intraday high of $835 billion on January 7, according to CoinMarketCap.com, cryptocurrencies began to sink...precipitously. With the exception of a few short-lived rebounds, digital currency valuations have been in retracement mode ever since. In fact, the aggregate value of virtual currencies recently hit $232 billion, which represents a 72% peak-to-trough decline, and somewhat rivals the 78% plummet in the Nasdaq following the dot-com crash.
Part of this recent selling may have to do with investors locking in massive gains. After all, some of the biggest names in the cryptocurrency space delivered mind-boggling returns in 2017, including Ethereum and Ripple, which rose 9,383% and 35,564%, respectively. But there appears to be something even more pressing at hand behind this sell-off: the desire from Wall Street and investors to see tangible results.
In the cryptocurrency coming-out party that was 2017, virtual currencies regularly soared after announcing or hinting about corporate partnerships or tie-ups. For example, IOTA soared in the final two months of the year following the beta launch of its Data Marketplace, and announcing that a bevy of brand-name companies, including Microsoft, were participants providing feedback or some form of support on the project. Likewise, Ripple ascended to the heavens after announcing partnerships with American Express and Banco Santander in November, and MoneyGram International in January.
However, we're not seeing that same enthusiasm from investors any longer. Last month, IOTA announced partnered projects with Volkswagen, Nordic Semiconductors, and SinoPac, yet its MIOTA coin wound up shedding nearly half of its value in June. Similarly, Ripple has continued to announce new additions to RippleNet, yet has seen its XRP coin decline significantly in value.
After one of the biggest rallies investors have ever witnessed, it's finally happened: It's officially put up or shut up time in the cryptocurrency space.
It's put up or shut up time
The biggest question mark in the virtual currency space revolves around blockchain technology, which some optimists have anointed as the greatest thing since sliced bread. Blockchain is the digital, distributed, and decentralized ledger that underlies most cryptocurrencies and is responsible for processing transactions without the need for a financial intermediary, as well as logging data in a transparent and unchanging manner.
On paper, blockchain has a lot of potential in both the financial service and nonfinancial setting. It could expedite money flows from one party to another, as well as help businesses track goods in a supply chain in real time. The list of what blockchain can do is actually quite long. But what blockchain hasn't done is demonstrate that it can provide real-world benefits without any training wheels.
You see, up to this point, we've witnessed plenty of successful proof-of-concept testing done with blockchain, but we haven't seen any big businesses adopting the technology on a broad basis. That's because blockchain hasn't yet proven its ability to scale. Yet, blockchain can't prove its ability to scale if it's not given an opportunity by large businesses. We call this a Catch-22, and it's made the near term for blockchain incredibly murky.
Despite the fact that cryptocurrencies have no traditional fundamental metrics upon which they can be valued, investors have piled into virtual coins with the assumption that blockchain acceptance would be swift. However, that hasn't been the case, and it's thrown the entire thesis of owning cryptocurrencies into limbo.
Don't overlook these concerns, either
To be clear, this isn't an easy fix for the developers behind virtual currencies. Proving scalability will probably take years.
Furthermore, these developers will have to convince businesses that blockchain technology is just as safe, if not safer, than existing infrastructure, which is debatable. According to a recent analysis from Carbon Black, some $1.1 billion in cryptocurrencies was stolen in a little over five months since 2018 began. Worse yet, because cryptocurrencies are mostly unregulated, there's little the Securities and Exchange Commission can do to recover stolen funds, some of which are concealed by privacy coins that obfuscate the sender and receive of funds.
Another concern to be aware of is the growing presence of institutional investors. I know what you're probably thinking: "Doesn't the presence of financial institutions validate cryptocurrencies?" Unfortunately, the answer is no. The reason being that most institutional firms have a mixed or negative view on virtual currencies, and their entrance into the space has coincided with the precipitous decline in bitcoin futures, which were introduced in mid-December.
Investors want tangible results, and this slide in cryptocurrency valuations may not end until they get them.