What a difference a year makes.

On Dec. 17, 2017, bitcoin could not be denied. Arguably the hottest cryptocurrency on the planet, bitcoin rallied on an intraday basis to eclipse $20,000 per token for the first time in its history. Little did cryptocurrency investors know that it would be a short-lived phenomenon.

Since briefly cresting at $20,000, the most popular crypto token has lost 80% of its value, or more than $16,000. Amazingly enough, though, bitcoin is still outperforming many of its large peers like Ethereum and Ripple, which have lost roughly 90% since their all-time highs.

To understand how things could have gone so wrong, so quickly for bitcoin, we first have to take a brief walk down memory lane and examine what fueled its meteoric rise late last year.

An up-close look at a physical gold bitcoin.

Image source: Getty Images.

How bitcoin (briefly) achieved greatness

The rally in bitcoin can be summarized by three words: blockchain, regulation, and retail.

Investors were (and arguably still are) excited about the potential for blockchain. Blockchain is the digital and decentralized ledger that underlies bitcoin and is responsible for the transmission of currency, in this case bitcoin tokens, without the need for traditional banking networks. It's designed to expedite the validation and settlement process, especially in cross-border transactions.

There was also a lack of regulation that seemed to fuel investors' interest. Viewed as something of a libertarians' currency, most federal governments maintained a hands-off approach to bitcoin and other cryptocurrencies, allowing them to thrive.

Lastly, for nearly all of 2017, bitcoin and the crypto landscape were dominated by retail investors. Wall Street financial institutions had little desire to trade on decentralized exchanges (or were barred from doing so), meaning the emotions of retail investors were primarily at the wheel.

A plunging bitcoin token with a declining chart in the background.

Image source: Getty Images.

Four reasons bitcoin lost its luster in 2018

With the exception of the first week of January, the entire crypto space, led by bitcoin, has been bleeding red in 2018. There appear to be four main catalysts weighing down bitcoin and its peers.

To begin with, Wall Street skeptics were finally able to put their money to work. In mid-December 2017, CME Group and Cboe Global Markets both began bitcoin futures contract trading on their respective platforms. This opened the door for large financial institutions to get involved, and, as you can imagine, most of these firms didn't believe bitcoin was worth anywhere near where it was trading.

Another problem is that although blockchain has performed admirably in small-scale and pilot tests, it's a long way from being a real-world solution. Corporations are leery about making the switch to blockchain without concrete data that its speed and security are an upgrade over existing software. Yet the only way to accumulate that type of data is for businesses to give blockchain a chance. This is a Catch-22 that could take years to play out, which means blockchain, despite its pie-in-the-sky potential, is years away from being widely adopted technology.

We're also witnessing a step-up in regulation that isn't sitting well with investors who value anonymity. It began in late January, when South Korea announced that it would only allow individuals with a verified bank account to add funds to a linked cryptocurrency exchange. This is noteworthy because the South Korean won is the second-most-used currency in global bitcoin trading behind the U.S. dollar. More recently, the U.S. Securities and Exchange Commission (SEC) has been cracking down on initial coin offerings. The less anonymity, the less luster for bitcoin.

Then there's the concern about security, which is ironic considering that blockchain is designed to be more secure than traditional networks. Through the first five months of 2018, approximately $1.1 billion in cryptocurrencies were stolen by hackers, according to an analysis from Carbon Black. Given that cryptocurrencies like bitcoin aren't regulated, there's little the SEC can do to protect investors and recover their tokens if they're stolen. 

Where does bitcoin go from here?

Where does all of that leave bitcoin going forward? My suspicion is that more pain lies ahead.

Blockchain was the initial driver of this group of tokens, and its success or failure will determine how well bitcoin and its peers perform. Although we've witnessed a handful of projects from brand-name companies eager to test out the capabilities of blockchain, it's simply not a needle-mover. Until we see blockchain becoming a mainstream technology, tokens like bitcoin may struggle to find a long-term catalyst.

Arguably an even bigger concern is the disconnect between blockchain and crypto tokens, including bitcoin. Brand-name companies like Mastercard are in the process of developing hybrid networks that could allow traditional currencies such as the U.S. dollar or the South Korean won to be transmitted over blockchain networks. Should this idea prove successful and catch on, it would make crypto tokens obsolete.

The bottom line is that blockchain, not the tokens themselves, is where the real value lies. Yet investors in tokens like bitcoin receive no ownership whatsoever in the underlying blockchain technology.

That raises the question: What real value is there in crypto tokens? Until we can answer this question confidently, bitcoin shouldn't be in your investment portfolio.