Last year, cryptocurrencies could do no wrong. In fact, you'd have a hard time finding an asset class that had a better single-year performance in all of history relative to digital currencies.

After beginning the year with an aggregate market cap of just $17.7 billion, cryptocurrencies ended 2017 with a combined value of about $613 billion. That's better than a 3,300% increase in value for those of you keeping score at home. For added context, the stock market historically gains 7% per year, inclusive of dividend reinvestment and when adjusted for inflation. It would typically take stocks decades to deliver the gains experienced by cryptocurrency investors over just a 12-month period.

A gold physical bitcoin screaming lower, with a plunging chart in the background.

Image source: Getty Images.

How the mighty have fallen

However, this year has turned virtual currencies on their heads. Following a continuation of the rally during the first week of January that took the aggregate market cap to as high as $835 billion, digital currencies have since lost more than three-quarters of their value.

It's been a virtual graveyard of sorts for investors, with practically all of the largest and most popular cryptocurrencies sinking from their all-time highs. Here's a snapshot of how the top 14 cryptocurrencies have fared since their peak, according to CoinMarketCap.com.

  • Bitcoin: down 68% since peaking at $20,089
  • Ethereum: down 80% since peaking at $1,432.88
  • Ripple: down 92% since peaking at $3.84
  • Bitcoin cash: down 88% since peaking at $4,355.62
  • EOS: down 79% since peaking at $22.89
  • Stellar: down 77% since peaking at $0.938144
  • Litecoin: down 85% since peaking at $375.29
  • Cardano: down 93% since peaking at $1.33
  • Ethereum Classic: down 69% since peaking at $47.77
  • Monero: down 81% since peaking at $495.84
  • Tron: down 93% since peaking at $0.300363
  • IOTA: down 92% since peaking at $5.69
  • Dash: down 89% since peaking at $1,394.28
  • NEO: down 91% since peaking at $196.85

I've got one word that sums this up, and it's "yuck!"

Excluding Tether, which is a dollar-backed virtual currency that's primarily used as an intermediary on cryptocurrency exchanges, the top-performing cryptocurrency with a current market cap over $1 billion is bitcoin, which has lost "just" 68% of its value since mid-December. Quite a few others, including Ripple, Cardano, NEO, and TRON, and seen more than 90% of their peak valuation disappear.

A stack of fanned hundred dollar bills transforming into the digital blockchain.

Image source: Getty Images.

Why crypto has fallen out of favor: Let me count the ways

Suffice it to say that virtual currencies are no longer the darlings of investors that they were in 2017, and there are no shortage of reasons for that.

1. Virtual currencies face the proof-of-concept conundrum

Perhaps the biggest issue with virtual currencies is what I like to refer to as the "proof-of-concept conundrum."

There's no doubt in my mind that the biggest catalyst pushing digital currencies higher in 2017 was the emergence of blockchain technology. Blockchain is the digital, distributed, and decentralized ledger responsible for processing transactions without the need for a third-party provider, as well as logging data in a transparent and immutable manner. In other words, blockchain has the potential to process financial transactions in close to real time, even cross-border transactions, and it could be transformative in non-financial applications, too.

The problem is that while blockchain has worked wonders in defined small-scale testing and demos, it's not been unleashed in the real world. Without its ability to scale having been tested, businesses are unwilling to deploy the technology on a broad scale. But the only way blockchain's ability to scale can be determined is if businesses give the technology a chance. It could take years to work out the kinks to this Catch-22.

A man in a suit giving the thumbs-down sign.

Image source: Getty Images.

2. Wall Street makes its presence known

Before December 2017, cryptocurrency trading was conducted almost entirely by retail investors. That was because institutional investors on Wall Street were either barred by their company from trading in cryptocurrencies, or they simply didn't want to dabble on decentralized exchanges.

However, things changed in December. Both the CBOE Global Markets and CME Group issued futures contracts for bitcoin on their respective trading platforms. These contracts gave institutional investors a way to influence the crypto market through traditional platforms for the first time. It also injected the first major dose of skepticism from Wall Street, which has since weighed on digital tokens.

3. Security is a genuine concern

Security concerns have also plagued this new asset class. According to an analysis by Carbon Black, hackers stole approximately $1.1 billion worth of cryptocurrency over the first five months of 2018. A significant portion of what was stolen turned out to be Monero's XMR token. Monero is part of the privacy-coin movement that works to obfuscate the sender and receiver of funds, which makes tracking down stolen digital tokens practically impossible.

The icing on the cake is that the Securities and Exchange Commission has cautioned investors that its hands are pretty much tied on protecting them from crypto fraud, given that many of these transactions occur outside the United States. 

4. New ideas take time to mature

This decline in cryptocurrencies can also be blamed on the simple fact that it takes time for new ideas and technologies to mature.

As noted, blockchain offers plenty of potential for the financial-services industry and non-financial businesses. But it's highly unlikely that businesses are going to welcome blockchain and crypto tokens without first proving their ability to scale. In each and every instance where the "next big thing" hit Wall Street -- decoding the human genome, internet business-to-business commerce, 3D printing, and so on -- it took years for the underlying technology to build its base and mature. Crypto and blockchain look to be following a similar path.

A frustrated man grasping his head and looking at losses on his computer screen.

Image source: Getty Images.

5. Euphoria has worn off

There's little denying that cryptocurrencies were driven by the euphoria and speculation associated with retail investors in 2017. Emotion-driven investing can turn on a dime, just as we've seen this year. With the thesis that digital coins can't drop now being broken, and cryptocurrencies failing to hold up during the stock market correction in the first quarter, numerous retail-investor perceptions have been broken.

6. There's little correlation between tokens and blockchain

Making matters more complicated, there are no traditional ways to value cryptocurrencies. Whereas we can look at a publicly traded company's balance sheet, earnings report, and management statements to get a feel for how well or poorly a business is performing, there are no concrete data to be pored over when it comes to cryptocurrencies, other than processing time, which tells us very little about the long-term survivability and performance of a digital token.

The other issue here is that there's no true correlation between cryptocurrencies and their underlying blockchain. In other words, if investors buy into a digital token, they don't gain ownership in the blockchain, which is where the true value lies. Furthermore, it's unclear how digital currency adoption leads to developers making money. In essence, greater adoption doesn't logically equate to a more valuable cryptocurrency.

7. Oversaturation is a big problem

Finally, there are just way too many cryptocurrencies for investors to choose from. At last check, there were somewhere in the neighborhood of 1,800 digital tokens for investors to consider, although many of these tokens could be considered dead money. Cryptocurrencies are desperately in need of consolidation if the top-tier tokens have any hope of standing out.

In short, there are plenty of reasons cryptocurrencies have sunk, and there's little reason to believe this move lower won't continue in the near term.

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.