Even the most ardent crypto evangelist must admit that bitcoin appears to have been the worst investment of 2018, at least in pure dollar terms. The cryptocurrency has lost almost 80 percent of its market capitalization since it established an all-time high at around $327.15 billion. The adoption rate and volume have dropped likewise. Organizations that were planning to launch their bitcoin-based services have delayed their projects or scrapped them entirely. As any seasoned trader would say, the bitcoin bubble is bursting — or has burst already.
The Anatomy of a Bitcoin Bubble
The surprising upturns and downturns of a financial market can confuse onlookers. It eventually is a game of passing sentiments – from one investor to another. If one sells, other buys. But in the event of a crash, when one sells, nobody wants to buy. It starts with a few investors dumping assets at high, then spirals outward. Other investors flock the selling action purely because of panic and price starts plummeting faster. It attracts more selling pressure, leading to fission.
What 2018 brought to the bitcoin market was a lot or sellers against limited buyers. In 2017, it was the opposite – more buyers against fewer sellers. The diverse performance of both the financial years, in successive order, shows that investors were purchasing bitcoin on either the speculation of a bull run or to acquire other digital assets that also promised higher returns in less time.
ICOs, as they are called, were a phenomenon back in 2017. Ethereum-enabled blockchain projects, claiming to be the next Apple or Microsoft, raised funds after selling their unregistered, unregulated digital assets for top cryptocurrencies like bitcoin. The buy orders, therefore, started piling up, leading the bitcoin’s value to its all-time high at $20,000.
The year 2018 was the time of delivery, but no ICO turned up for the show. According to a research paper published by the Carroll School of Management at Boston College, almost half of the blockchain projects were found to be failing within four months of their introduction.
“What we find is that once you go beyond three months, at most six months, they don’t outperform other cryptocurrencies,” researcher Leonard Kostovetsky had told Bloomberg. “The strongest return is actually in the first month.”
The biggest takeaway is that that these blockchain projects had an ample amount of bitcoin tokens with them. So, they could have likely dumped their bitcoin reserves for fiat to either run away or to pay for their operational costs. Hence, the bubble burst.
Digital Currency Group founder Barry Silbert supported the theory during an interview to CNBC. Galaxy Digital Holdings’ chief Mike Novogratz also told Bloomberg that ICO market is pretty much dead after “a lot of hype,” and that bitcoin will emerge out of its depression down the road.
Bitcoin: the Long Road to Recovery
The bursting of a bubble does not necessarily mean the death of the underlying asset. The financial industry is full of such examples where traditional metrics defined the overvaluation of markets followed by a long-term bearish correction.
The dot-com bubble, for instance, comes close to resembling the crypto bubble. In the late 1990s, the introduction of the internet prompted a massive wave of speculation in dot-com companies. The Nasdaq Composite Index, which listed most of these tech startups, jumped from under 500 at the beginning of the 90s to establish highs over 5,000 in March 2000. The index plunged by 80 percent after that but recovered back by 2015 to set new highs.
The crypto market has crashed similarly after most of its startups failed after raising millions of dollars in over-hyped investments. Bitcoin, as many believe, is the survivor of a market-wide wipe off.
Lou Kerner, a crypto venture capitalist, called bitcoin the Amazon of crypto, stating that the digital currency would survive the crypto bubble burst similarly to how Amazon did after the dot-com crash.
“If you go back to the internet bubble, which is what a lot of us in crypto look at for direction, Amazon, arguably one of the greatest companies in the history of the mankind, was down over 95 percent over two years,” he told CNBC in November.
Crypto has been so weak because most of it there’s no underlying value outside of confidence. [But] bitcoin, itself, we think is going to replace gold eventually. Gold is an $8 trillion thing.
The market is already preparing a welcome for bitcoin as it transits from retail to more serious institutions in 2019. Bakkt, a bitcoin futures platform backed by Intercontinental Exchange, will be launched at the end of January. The US Securities and Exchange Commission (SEC) would also provide its final take on the VanEck’s bitcoin ETF which, if approved, could open the gates of multi-billion dollars worth of investments into the bitcoin space.
Bitcoin Dominance Rising
Bitcoin dominance refers to the market share of bitcoin against the rest of the crypto market. Ever since the crash started taking place, investors constantly flocked back towards bitcoin. Since November, bitcoin has been occupying around 50 percent of the entire crypto market, reflecting investors’ improved sentiment.
Cypherpunk Jameson Lopp, in his latest report, also found that Bitcoin is growing on almost the metrics other than economics. In 2018, the crypto market led by the digital currency raised $3.12 billion in investment, four times more than in 2017; the academic and user interest in it grew twofold; the coin’s development repository saw more commits than any other crypto project; and its Lightning Network solution gained momentum all across the community.
“Yes, bitcoin fared poorly [concerning the] exchange rate in 2018,” said Lopp. “But by almost any other metric the system is improving and growing. Those of us who are dedicated to this system shall continue to BUILD and add value; we have no control over the market, but I expect that it will catch up to us sooner or later.”
With strong fundamentals behind it, bitcoin would most likely correct, but it would be more mature than the earlier corrections. Rich investors, who are already hit by a US stock market crash, would be more inclined to move their value towards safe havens like the dollar, the yen, and gold. Bitcoin, being a relatively new phenomenon, could catch their eyes once its infrastructure will be ready to handle more volume and liquidity.
Featured Image from Shutterstock. Price Charts from TradingView.
Last modified: March 4, 2021 3:17 PM