Bring up cryptocurrency today, and you are likely to hear that the crypto market is down. People have finally realized that cryptocurrency has no real value — or so the argument goes.
Without going into the tenuous value of other assets, the fact that crypto isn’t backed by anything is not the real reason for today’s bear market. Instead, the crypto market is facing significant growing pains, coupled with a public opinion crisis. But when cryptocurrency entrepreneurs, investors and regulators address the following nine factors, you can expect a major market shift.
1. Making money in the crypto market is less straight forward than it used to be.
Early cryptocurrency adopters either capitalized on ICOs (Initial Coin Offerings) by getting in early and getting out, mining and holding cryptocurrency for long periods of time or by day trading.
In today’s investment climate, none of these approaches are sure to make you a fortune. Bitcoin mining has become more difficult and more competitive, meaning that the hash rate required to mine isn’t always worth the electricity bill.
The SEC (Securities and Exchange Commission) has turned its attention toward prosecuting fraudulent ICOs and crafting regulations. Across the board, ICOs have received criticism for serving as a means of fundraising without giving investors anything significant in return. Of course, there are also a lot of legitimate ICOs, though these receive less media attention.
And day trading is much more difficult in a bear market, especially one as unpredictable as the one we’re currently in.
This isn’t to say that there isn’t another wave of opportunity coming to cryptocurrency, blockchain technology and innovative applications of both — think cannabis cryptocurrency. Crypto just needs another round of innovation for investors to make money.
2. SEC regulations have stalled.
We haven’t seen another crypto market boom largely due to regulatory uncertainty. The SEC is increasingly regulating crypto, but so far, it’s been a slow process.
In 2018, the SEC fined a cryptocurrency exchange and companies that launched ICOs by misrepresenting security tokens as utility tokens, two types of cryptocurrency with important legal distinctions.
To date, the SEC has also denied nine Bitcoin ETFs (Exchange Traded Funds) and delayed reviewing a tenth. This has had a negative effect on the crypto market since the summer of 2018.
Legalizing cryptocurrency ETFs would allow institutions and individuals to invest in cryptocurrency without buying coins or tokens. By mitigating risk in this way, ETFs would mean large scale investment and more stability.
3. Many view cryptocurrency as a short-term investment.
Though institutional investing in cryptocurrency is growing, most investors are millennials who view crypto as a short term investment. Unlike other asset classes, people do not typically include cryptocurrency in their retirement plans.
Instead, crypto investors tend to want a quick return, meaning that they go short rather than long. When everyone is trying to get in and out, the market becomes volatile.
4. Market manipulation is widespread.
One way for crypto investors to turn a profit is through “pump and dump” schemes. This is cryptocurrency slang for inflating a cryptocurrency’s value only to sell it off at its peak.
Pump and dumps are relatively easy to accomplish, especially with smaller market cap cryptocurrencies, because exchanges have different levels of liquidity, which impacts how they price their crypto.
Cryptocurrency is, by definition, decentralized, meaning that no centralized entity like a bank or government controls it. As a result, supply and demand determine its price, and supply differs widely between exchanges. If someone buys a lot of one crypto on a smaller exchange, investors on other exchanges will notice and buy the same crypto, triggering a market-wide price increase.
Larger market cap cryptocurrencies are not immune to this type of manipulation, either. For example, Bitcoin (BTC) is currently worth five dollars more on Bittrex than on Coinbase Pro, two large exchanges.
5. The Department of Justice is investigating Tether (USDT).
The U.S. Department of Justice (DOJ) is investigating Bitcoin’s meteoric price rise in late 2017. According to some sources, Bitcoin’s price rose to nearly $20,000 due to manipulation on the cryptocurrency exchange Bitfinex.
Bitfinex issues the stablecoin Tether (USDT). Researchers at the University of Texas found that every time Bitcoin’s price began to decrease, Tether had been used to buy Bitcoin on various exchanges.
Now, the DOJ and the Commodity Futures Trading Commission (CFTC) are involved. Tether, Ltd., has also been accused of not having the funds to support its 1 to 1 USDT to USD ratio that it claims to have.
The uncertainty surrounding whether Tether is actually a stablecoin and Bitcoin’s bull run have negatively affected investor confidence in the crypto market.
6. Risk diversification isn’t yet possible.
When confronted with possible manipulation and market volatility, investors typically diversify their assets. Theoretically, this could mean investing in Bitcoin (BTC), Ethereum (ETH) and higher risk ICOs or altcoins.
But in the crypto market, diversification doesn’t work the way investors want it to. More than 50 percent of the cryptocurrency market cap is Bitcoin alone. This is because most trading occurs between BTC and altcoins since you cannot convert fiat, meaning government-backed currency like the USD, directly into most cryptocurrencies.
So when Bitcoin’s price falters, investors tend to convert their cryptocurrencies into stablecoins or fiat, triggering a large-scale market decline. In other words, risk diversification doesn’t work in crypto yet.
7. Lack of liquidity deters widespread adoption.
Increased liquidity would mean price stability, easier, cheaper transactions, and more investor confidence. It would also prevent Bitcoin whales, or large buys, from manipulating cryptocurrency prices.
Stability and fast transactions translate to wider cryptocurrency adoption, meaning that people besides cyberpunks and techies would feel comfortable converting their U.S. dollars into cryptocurrencies knowing that they could easily convert it back without paying steep transaction fees.
Today, however, exchanges do not have enough liquidity to provide these functions, despite the fact that cryptocurrency adoption is on the rise. Some suggest that the best way to increase liquidity is to create a large exchange pool used by multiple exchanges.
8. Security remains a concern for prospective investors.
The crypto market has received a lot of bad press for hacks, exit scams and Ponzi schemes. For some, ICOs are synonymous with fraud, though this is far from the truth.
However, cryptocurrency exchange security remains a glaring issue The fact is that $1.1 billion in cryptocurrency was hacked in 2018. In the previous year, cryptocurrency hacks rose 369 percent.
This is because stealing funds from exchanges, rather than banks, is a lot easier to do. Exchanges can be small companies with inadequate security to control millions in digital assets. Though there are many secure options, exchanges are not to be trusted across the board.
9. The Bitcoin Cash hard fork destabilized the crypto market.
In late 2018, Bitcoin Cash (BCH) hard forked into two separate cryptocurrencies: Bitcoin Cash SV and Bitcoin Cash ABC.
What happened was that developers and miners within the Bitcoin Cash community separated into two camps, each with their own vision for the currency. Because the changes they wanted to implement were incompatible with one another — adding oracles, smart contracts, increasing block size — the cryptocurrency’s blockchain split in two.
Before the split, Bitcoin Cash’s price shot up around 40 percent. This is because investors receive the same amount of each cryptocurrency when it splits it two, thereby doubling their funds.
After the hard fork, prices plummeted. There is speculation that the competition between SV and ABC inspired uncertainty in the entire market. Since the hard fork on Nov. 15, the entire market has been in decline.
The crypto market is down because regulation is just beginning.
Cryptocurrecy’s biggest problem is also its greatest investment advantage: It’s brand new. This means that we have yet to figure out how to regulate it. For this reason, some experts say that it’s not too late to invest in cryptocurrency.
Once exchanges are standardized and provide enough liquidity and security, investors will be confident enough to go long in crypto. And when it becomes possible to exchange fiat for altcoins, investors will be able to diversify their portfolios without worrying that they’ll lose everything at the first signs of a bear market.
Cryptocurrencies are as real as any other asset: The more institutions and people believe in the power of instantaneous, borderless assets, the more they’ll be worth.