Cryptocurrencies Are in Free Fall, but Is It All Bad?

Cryptocurrencies are in free fall, sparing only a handful of coins. But is it all bad? Or can some good come from this flash crash of January 2018?

According to CoinMarketCap, at the time of writing, only five of the top 100 coins by market cap have avoided a plunge in value over the past 24-hours. The vast majority of those falls have been in the double-digits. But the damage has not been limited to altcoins. The top eleven currencies have all similarly recorded double-digit falls.

Bitcoin has fallen to a six-week low, and data from CoinMarketCap recorded Bitcoin’s market cap, at its lowest point, at almost half of what it was a month ago. $250 billion has been wiped off the total cryptocurrency market since Monday.

There are many factors that may have contributed to the bloodletting. There is continued uncertainty over the regulatory future of cryptocurrency in Korea, which represents 12% of global trading volumes. The Chinese tightening of regulations of cryptocurrencies, ICOs, and mining present potential risks to the market’s viability. Although the Chinese contribution to trading volume has fallen to 10%, it had been a significant player in the development of virtual currencies. There are growing fears of more regulation of the industry. French Finance Minister Bruno Le Maire has proposed a discussion ‘on the question of Bitcoin’ at the forthcoming G20 meeting in April. His German and Italian counterparts have agreed. Yesterday, the finance minister announced the formation of a task force to devise regulations for cryptocurrencies, led by a notorious bitcoin skeptic.

Exacerbating the plunge has been the spectacular rise of altcoin valuations over recent months. Those gains have led some observers to predict a dire future for many of these smaller coins that may not offer any new value already provided by the more established coins.

The Bright Side

But in the bloodbath of the current slump, can any good from of it? Consolidation periods can often be healthy ways for markets to avoid forming short-term bubbles, although it could be argued the bubble has already formed. It is also important to remember that the cryptocurrency market has seen major price corrections in the past and bounced back from them.

A rising tide lifts all boats. A correction can provide an opportune time for investors to reassess their strategies. There is a well-known quote in investor circles that “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” The euphoria of the past few months may have clouded the judgment of many cryptocurrency and ICO investors.

The blockchain market has become overheated and increasingly sullied by new entrants with dubious credentials, projects without significant benefits or use cases, and little underlying value. Poorly drafted whitepapers now litter the crypto-space. What better way to separate projects that are worthwhile from those that may not be than a substantial crash.

As recently as December, when valuations surpassed $500 billion, Ethereum creator Vitalik Buterin asked the question, “Have we earned it?” The destructive nature of the current crash may force coin developers to focus on creating value and utility for their currencies, and ultimately for the public. This would discourage a reliance on hype-fueled market speculation. This is especially true of altcoins.

Some projects may, in fact, be creatively destroyed. But what will replace them will be better, more valuable, and more useful to a society increasingly reliant on innovative solutions to its many problems.

Furthermore, for seasoned crypto investors, dips are opportune times to buy. For newer investors, this is the first major correction they have experienced. Some may have sold their positions in fear and be too spooked to return to the crypto-space.

For others, it will serve as a reminder that it is sometimes important to ignore the hype. A thorough evaluation of the fundamentals of assets, what unmet needs they serve, how they can be useful, and how credentialed the team behind them is will replace an unsophisticated pump-and-dump mentality. The crypto landscape will be healthier for the greater average wisdom among investors.

Finally, if one of the fears driving the crash – the threat of regulation – does come to fruition, that may actually be beneficial for the cryptocurrency market. A trajectory of a more sustainable growth path and more widespread uptake among retailers, for example, could help cryptocurrencies offer measurable value.

More regulation might also encourage hitherto reluctant fund managers to enter the space, as well as skeptical retail investors, providing more liquidity and greater stability.

So while the January flash crash of 2018 is difficult for investors to enjoy, it may result in some long-term positives.  

Glass half full image from Shutterstock.