Bloodbath Tuesday- Are We Experiencing A Cryptocurrency Market Crash or A Market Correction?

Intro

As of 16th January 2018, in a matter of nine days, the cryptocurrency total market capitalisation had dropped by 32.9% from being at an all-time high of £830 billion. The market is going into a frenzy and many media critics are stating this is the inevitable crash that was predicted in the previous weeks; as Bitcoin along with all other cryptocurrencies was seeing unprecedented gains since the beginning of December 2017. According to reports by Business Insider UK, Increased regulatory scrutiny from South Korea has dampened sentiment in the sector. Mati Greenspan, an analyst at the trading platform eToro, said declining volumes from Japan and South Korea appeared to be behind Tuesday morning’s sell-off.

XRP was trading as high as $3.84 on the 4th of January and has lost a value of 67.9% to $1.23. The obvious question now is, do we think this is the apocalypse of XRP, Bitcoin & other cryptocurrencies or are we seeing a correction in price in a highly speculative market?

Market crashes or Market Correction- Timeline History

We can analyse and compare recent market crashes or the largest market declines stemming from the 2008 global financial crisis.

2015-16 Stock Market- Since 2008, on 21st August 2015 the Dow Jones fell by 530.94 points or by 3.1% and was down 10.1% from its previous peak. On August 24th commodities markets such as oil hit a six-year low, and Foreign exchange and Asian currencies vs the dollar (except the yen) lost significant value. As a result of this, an estimated 10 trillion dollars wiped off the global markets. 

Did the Stock Market (Dow Jones S&P 500), Forex Market, Futures Market etc. survive and are they still active? Yes.

2008 Global Financial Crisis- This was the holy grail of our times. The worst economic disaster since the great depression of 2008. The housing market crashed caused by major banks and institutions profiting from risky assets such as mortgage back securities without placing risk controls. The effects were catastrophic causing people to be homeless (poverty), huge price inflation of raw goods and also caused famine in some third-world countries (and much more). The U.S. government bailed out these same institutions using taxpayer money.

Did the Stock Market (Dow Jones S&P 500), Forex Market, Futures Market etc. survive and are they still active? Yes.

The year 2000 Dot.com bubble- With the emergence and growth of bitcoin/cryptocurrency, a market many investors, writers and industry experts believe the eventual crash of cryptocurrency will be similar to that of the dot.com bubble. We saw excessive over-valuation and speculation which resulted in many companies collapsing and falling under the bus e.g. broadcast.com, Boo.com and even Flooz.com (a digital currency) etc. The result was an estimated $5 trillion was wiped off the markets.

Does the Internet still exist and are there any dot.com companies trading today? Many companies & organisations went through bankruptcy however several companies stabilised, gained market share, and eventually dominated their respective fields. A few large dot-com companies, such as Amazon.com, eBay, and Google, became industry-dominating mega-firms and are fortune 500 companies.

Key Differences

between previous market crashes vs the current condition of the cryptocurrency market

Overall Market Capitalisation under one trillion is not very significant

The cryptocurrency market is relatively new with both Bitcoin and Ethereum being the top two cryptocurrencies by market capitalisation. Bitcoin was the first and has been around for over 8 years.  The total current market cap for both coins as of today is $317bn which is 53.2% of the total market. Ethereum has only existed in the marketplace since 2015. One key difference to note is that the overall value of the market is under a trillion dollars. If we believe the market was crashing then it would not be classed as a significant crash compared to those listed above. One may come to the conclusion based on the overall value of the market, that if we are experiencing a correction in the market then there might be a major crash in the pipeline.

One coin still overshadows the other currencies/coins: Bitcoin

According to media outlets, the general speculation on the crypto market is mainly around Bitcoin being over-valued and inflated. The current price of a Bitcoin (BTC) is $11,351 (16th Jan) but had been at an all-time high of $19,535. The major sticking point being it is referred to as digital gold and a medium of store value. Transaction fees are very high and It is slow and impractical for retail transactions. It doesn’t have the application and further advanced utility of blockchain technology that other cryptocurrencies offer such as Ripple (XRP), Stellar Lumens (XLM), Cardano (ADA) or even IOTA.

Regulation & Decentralisation

Although at almost all times we can blame previous market crashes due to lack of regulation, it becomes more complex to regulate the market based on a decentralised distributed ledger i.e. anyone can purchase or transfer their cryptocurrency holdings to any other person without the need for an intermediary (such as an exchange) or update a central record of ownership. The stock market has exchanges such as the LSE and NASDAQ (central authorities). The regulation of cryptocurrencies is still very much in the infant stage. As the market grows we will see authorities like the SEC trying to impose regulation on ICOs (Initial coin offerings) as they have done with the securities market.  

Key Similarities

between previous market crashes vs the current condition of the cryptocurrency market

Total number of Assets/Markets (Tokens and Coins)

According to coinmarketcap.com, there are 1,450 cryptocurrencies in total in the market and each one has its unique function. At the time of the dot.com bubble many new companies were perceived to be growing at exponential rates (many went down). This is somewhat similar as many companies are raising funds and capital through ICOs. ICOs have been portrayed by the FCA (Financial Conduct Authority) as means of a scam and have warned investors to beware that it involves very high-risk and speculative investments, and often offer little or no protection to investors.  The growing number of ICOs and as mentioned before lack of regulation raises eyebrows that we may just be in a bubble or there may be one on its way shortly.

Even though we have seen major gains during the end of December last year and early this January, it is very premature to say this is the demise of crypto. Historically based on trend analysis we have seen the market going through a dip around mid-January and then smoothening out in February. It also comes down to whether you are an investor or trader, whether you’re in it for the long haul or if you’re purely a day trader. Historically we have been through this before with Bitcoin. Bitcoin recovered and then went on an unprecedented rally that has probably never been seen before in any type of asset, stock or commodity.

In an article by the Business Insider, Kenneth J. Heinz, President of HFR, said in a release announcing the new products: “Investor interest in funds offering exposure to Blockchain technologies and Cryptocurrencies has surged in recent months as these innovations continue to move towards the mainstream and generate compelling opportunities for investors, portfolio managers, traders and other market participants.”

The utility and benefit of blockchain technology

For instance, let’s understand the use and benefits of Ripple (known as XRP), which is a token that is designed for banks and money transfer companies. Typically, when we send International payments to our relatives, friends or for business purposes, major retail banks charge huge fees on transactions as well as the counterparty waits for days to receive funds. This has always been a major concern within the global payments industry. Ripple/XRP has been designed and created using sophisticated blockchain technology to resolve this trillion-dollar issue by sourcing liquidity on demand in real time, and by payment, providers to expand reach into new markets, provide faster payment settlements and lower foreign exchange costs. Currently, Ripple has partnerships with over 100 banks & remittance money transfer companies that include the likes of Standard Chartered Bank, Westpac, Banco Santander, BBVA and more recently MoneyGram (the Second largest Money Transfer company in the world).

Surely we cannot deny that Blockchain technology has many advantages for the general public, corporations and even governments. If you’re a day trader that trades on volatility then you can view it as a Market crash. However, if you’re a long-term investor that believes that the underlying currency whether it be Verge (XVG), Ripple (XRP), Stellar Lumens (XLM) or even Bitcoin (BTC) offers great technology and brings benefits to individuals, businesses, Institutions & even governments then it can only be deemed as a correction.