Author: Sean Williams | May 28, 2018
What does the remainder of 2018 hold for cryptocurrencies?
Last year was truly memorable for cryptocurrency investors. After beginning the year with a combined market cap of just $17.7 billion, the aggregate value of every virtual currency soared to $613 billion by year’s end. In percentage terms, we’re talking about an increase in market cap of better than 3,300%, which is likely the single-greatest year for any asset class in history. By comparison, the stock market, which is arguably the greatest creator of long-term wealth, has gained about 7% annually, inclusive of dividend reinvestment and when adjusted for inflation.
These incredible gains have the crypto investment community wondering what could possibly be next. Though no one knows that answer with any certainty, I’m absolutely willing to take what we’ve learned about virtual currencies so far and make seven educated guesses at what the remainder of 2018 might hold for this burgeoning asset class. In no particular order, and with no assurances that any or all of these predictions come true, here’s what investors might expect from cryptocurrencies for the rest of 2018.
1. The aggregate crypto market cap ends lower for the year
Last year, digital currencies were virtually unstoppable, and a big reason for that was a lack of institutional investor trading. Because there was almost no access to cryptocurrencies short of buying or selling them on a decentralized exchange, and institutional investors wanted nothing to do with these decentralized exchanges, it left retail investors to rule the roost, so to speak. These retail investors often had limited (or zero) means of betting against digital currencies -- a process known as short selling -- which left them but one choice: to root for continued upside. This retail investor bias is a big reason why cryptocurrencies soared so much in 2017.
However, beginning in mid-December 2017, and continuing through the first nearly five months of 2018, access to institutional investors has increased. There are now bitcoin futures listed on the CME Group’s (Nasdaq: CME) and CBOE Global Market’s (Nasdaq: CBOE) platforms, which allow Wall Street investors to place upside and downside bets on the world’s most valuable cryptocurrency. There have even been rumblings of late that investment bank Goldman Sachs is ready to set up a bitcoin futures trading operation. In short, with a fairer market -- i.e., one that allows investors to make money to the downside, just as retail investor bias has pushed virtual currencies to the upside -- my suspicion is that the crypto market cap will decline on a year-over-year basis.
2. Bitcoin will lose at least half of its value
At the beginning of the year, I predicted that bitcoin would lose at least half of its value twice during the course of the year. Between the beginning of the year and early February, bitcoin dropped to nearly $6,000 per coin, which was far less than half of where it began the year ($14,156 per coin). I’m sticking by my early-year prognostication that it’ll happen once more before the year is over.
What’ll cause bitcoin to be halved for a second time in 2018 is what remains to be seen. It’s possible that increased regulation in one of bitcoin’s key markets, such as the U.S. or South Korea, could be the culprit. The entrance of institutional investors, which some on Wall Street view as the validation of digital currencies as an accepted asset, may also be a downside catalyst as it introduces their crypto skepticism and deep pockets into the equation. Even bitcoin’s slow transaction-processing times, relative to most other virtual currencies, could prove to be its downfall. Regardless of what “X-factor” is to blame, I’d be looking for another swift move lower in bitcoin before the year is over.
3. Another virtual token will briefly surpass bitcoin in market cap
At the beginning of the year, I also predicted that bitcoin would temporarily lose its place as the largest virtual currency in the world -- and that’s another prediction I’m going to stick by.
Cryptocurrency investors tend to be easily perturbed by rumors. They’re also prone to having their emotions get the best of them, which leads to the wild vacillations we often see in bitcoin’s token price. I believe these emotions, and the short-sightedness of some retail investors, should open the door for another virtual token to briefly surpass bitcoin in market cap.
What token, you ask? The likeliest option would be Ethereum, which has regularly occupied the No. 2 spot in market cap behind bitcoin for almost the entirety of the past year. The Enterprise Ethereum Alliance, which is the largest open-source blockchain initiative in the world, is now more than 500 organizations strong. It has members from a variety of industries and sectors testing the Ethereum blockchain, along with its tethered and customizable smart contracts, in numerous small-scale projects. The Ethereum networks’ utility in the currency and non-currency setting, as opposed to bitcoin’s blockchain which is only viable in the currency setting, may allow Ethereum to completely erase the $70 billion in market cap it currently trails bitcoin.
4. The U.S. lays out more extensive cryptocurrency regulations
In December, the Securities and Exchange Commission (SEC) Chairman Jay Clayton issued a statement on cryptocurrencies and initial coin offerings that can be summarized in two words: “caveat emptor.” Clayton warned that the unregulated nature of these asset classes, as well as the fact that a lot of trading occurs outside the borders of the U.S., would make it difficult, if not impossible, for the SEC to act on behalf of investors should crypto fraud occur. It was, essentially, a call for regulation.
Earlier this year, we received a healthy dose of tax regulation when the Internal Revenue Service put its foot down on cryptocurrency tax evaders. With the passage of the Tax Cuts and Jobs Act in December, a lucrative loophole, known as like-kind exchanges, was removed. Ending this loophole meant that all virtual currency capital gains and losses would now need to be reported on federal income-tax returns.
As the year wears on, my prediction is that we’ll see more in the way of regulation from Washington, D.C. In particular, government officials dislike the anonymity associated with crypto trading, as well as its unregulated status. It’s possible the U.S. could mirror South Korea in requiring that banks verify the identities of individuals prior to allowing their bank accounts to be linked to decentralized cryptocurrency exchanges. Without this verification, no additional capital could be added to a decentralized crypto account. This regulation, while needed, could ultimately be what sends bitcoin into a tailspin.
5. A bitcoin ETF hits the market
Despite the NYSE and CBOE itching to bring a bitcoin exchange-traded fund (ETF) to market, those plans were shelved in mid-January. Dalia Blass, the SEC’s director of the division of investment management, issued a response to fund managers that demand answers to 31 questions! These questions primarily pertained to how mutual funds or ETFs planned to store and safeguard cryptocurrencies like bitcoin, as well as protect the interest of investors.
Assuming my prediction about a step-up in regulations from Washington proves correct, the next logical step would be for the SEC to allow a bitcoin ETF to hit the market later this year. Keep in mind that should a bitcoin ETF be allowed to come to market, it wouldn’t precisely track the price of bitcoin. Instead, it would be based on the price of bitcoin’s futures, which currently trade on the CBOE and CME platforms. Thus, one more thing that would have to be hashed out is which platform, the CBOE or CME, a bitcoin ETF would follow.
6. A merger occurs in the crypto space
According to CoinMarketCap.com, there are approximately 1,600 investable cryptocurrencies. Of these roughly 1,600 digital currencies, just 500 or so have a market cap north of $10 million, and a mere 91 had tallied in excess of $10 million worth of trading volume over the trailing 24-hour period. In other words, there are way too many cryptocurrencies clogging up the investable space, many of which aren’t very liquid. One way to fix this issue, short of removing certain digital currencies from exchanges, is through cryptocurrency mergers.
However, combining cryptocurrencies isn’t as easy as it sounds. Even though we’re essentially talking about making computer code compatible between two virtual tokens and their blockchains, the proprietary tweaks that crypto developers include on their networks and/or tokens makes a combination less than ideal more times than not.
Nonetheless, if smaller virtual currencies want to become relevant, or if mid-tier digital tokens want to surpass bitcoin, the idea of a merger or combination has to be on the table. For instance, in January, rumors swirled that bitcoin rival Litecoin and privacy coin Monero were in the early stages of considering a merger. Though this merger didn’t come to fruition, it marks the reality that consolidation is sorely needed in the crypto space. By year’s end, I predict we’ll witness the first notable merger.
7. A major country bans cryptocurrencies
Finally, I’m going out on a limb and predicting that a major country will join the half-dozen smaller countries to have banned cryptocurrencies. Currently, cryptocurrencies are illegal in Bolivia, Bangladesh, Ecuador, Kyrgyzstan, Morocco, and Nepal. There are also quite a few countries where crypto is frowned upon, but not wholly illegal, such as Venezuela and China.
What country might be the culprit? That may be asking a bit too much of my crystal ball, but my eyes are squarely on Britain. The writing appears to be on the wall after British banks banned bitcoin purchases with credit cards back in February, and, just weeks later, the Treasury Committee of the U.K. Parliament announced a probe into how cryptocurrencies are impacting U.K. consumers, investors, and businesses. This probe was launched as a result of the hype and volatility that has shrouded the crypto space. Should a major market like Britain ban cryptocurrencies, it would be a major blow to the confidence of emotional retail investors.
Predictions aside, keep this in mind
Regardless of whether these predictions turn out to be partially right, spot on, or out in left field, what can’t be denied are the risks involved with cryptocurrency investing.
For starters, cryptocurrencies lack the traditional fundamental metrics that aid investors in determining an appropriate valuation for an asset. With a publicly traded stock, we can look at balance sheets, income statements, earnings reports, and listen to the commentary of management when determining whether a stock is worth buying or not. Cryptocurrencies have virtually no metrics that can be examined, save for processing speed and daily average transactions, neither of which tells us much about the long-term value of digital currencies.
Just as worrisome is the fact that blockchain technology is stuck in a vicious Catch-22. The digital, distributed, and decentralized ledger that underlies most cryptocurrencies has worked splendidly when kept within the confines of small-scale projects. However, no businesses have been willing to take the training wheels completely off of blockchain yet, primarily because it’s untested in the real-world -- and gaining this real-world experience is only possible if big businesses give this technology a chance.
In sum, while cryptocurrencies are still liable to bring a lot of excitement to the table for the remainder of 2018, I’d suggest keeping your money safely on the sidelines and out of virtual tokens.
Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends CME Group. The Motley Fool recommends Cboe Global Markets and has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.