After being the best-performing
asset class in 2017, this year has been the worst for cryptocurrencies. The
total market capitalization of the currencies has declined from more than $850
billion in January to the current $110 billion. The decline has been caused by
a series of negative events that have continued to happen in the crypto
industry.
In January, the first bad news
came when Japan and South Korea announced that they would strengthen the
regulations in the currencies. This was big news because the two countries were
the major crypto hubs in the region. This news was followed by the ban on ICO
advertisements by Google, Facebook, and Twitter, which were the biggest
advertising channels for the industry. Without them, it was almost impossible
for ICO promoters to get their word out.
This was followed by the
increased hackings that have led to more than $800 million coins being stolen.
Then, the Securities and Exchange Commission (SEC) announced that it was
rejecting a number of ETF proposals because they exposed investors to a lot of
risks. All the negative news led to many holders of the cryptos exiting their
positions. As they exited their positions, they created more supply than
demand. The chart below shows the performance of the major cryptocurrencies in
the past few weeks.
The first lesson to learn from
the crash is that bubbles will always be here. Historically, bubbles have been
there and the results have been catastrophic. In the 17th century,
the tulip mania happened leaving many people in bankruptcy. This was a period
when people in Netherlands started hoarding tulips on the hopes that their
value will triple. Many borrowed to invest in the tulips. Ultimately, the price
declined.
In the late 90s, the dot com
bubble happened. This was after the successful IPO of companies like Netscape
and Amazon. This led to a craze in the dot com companies. People, including
veteran investors found themselves buying loads of worthless companies. Others
borrowed money to invest in these companies. Like in all bubbles, the price
collapsed and investors lost billions of dollars.
Before the 2008/9 crash, people
were buying loads of houses. Banks on the other hand were giving out funds to
people without doing their due diligence. This binge led to a bubble in the
housing prices as investors thought that the price will always go up.
Ultimately, house prices started to decline and investors lost their funds.
The same is true with the
cryptocurrencies industry. People who bought the cryptocurrencies early enough
believed solidly in the industry. They believed on the need for an alternative
to the fiat currencies. However, as the price started to move up, more
investors started getting into the industry for the opportunity that existed.
They had no interest in the role of the currencies in replacing the traditional
currencies. Instead, they wanted to buy the currencies and exit at a profit.
As the price started coming down,
the investors panicked and started selling the currencies. This created more
supply and the lack of confidence in the industry. This led to a sharp decline
in the industry as the currencies had no buyers.
The biggest lesson in all this is
on the perils of long-term investing. While many investors have made a fortune
as long-term investors, many have lost money because they did not forecast
future changes. For example, traditional wired telephony investors did not
forecast the disruptive changes of the mobile devices. Therefore, being a
trader can help you take advantage of the short-term movements in asset prices.
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