Crypto remains a minimal utility, speculative asset. Without widespread adoption of blockchain technology, cryptocurrencies resemble a pyramid scheme — with the core utility limited to speculation. You can’t buy that many things with popular digital currency. Select countries are cracking down on crypto. China is leading the way with a recent ban on all cryptocurrency exchanges; however, other countries are considering similar measures. Rules and regulations may help legitimize the use of cryptocurrency, but they will also likely affect the price. Cryptocurrencies haven’t decoupled from the stock market. While bitcoin and stocks appear to be inversely correlated in recent weeks, both asset classes have remained remarkably correlated throughout 2018.
Margin debt is a worry. Bitcoin’s meteoric rise was fueled by investor demand through margin trading (borrowing money to buy). Margin debt makes investors more vulnerable to price fluctuations and volatility shocks that can lead to even greater losses and selloffs, in the bitcoin era. The cryptocurrency market has lost billions from its peak. That’s more than the GDP of Norway. There is no doubt that the crypto market is in a bear market. But, why?
Reasons
There are several reasons why cryptocurrencies have suffered a market correction over the past few months – and they’re likely to lead to more declines in the future. There are many reasons for this drop, but I believe a lot of it can be attributed to the following five factors:
- The majority of cryptocurrencies have little utility value and remain speculative assets. Coins like TRON and XRP are not widely adopted by mainstream institutions or consumers. In addition, their technical developments aren’t much better than other coins on the market.
Fiat currencies have an inherent value because they are issued by a central bank and can be used to pay taxes. In theory, crypto tokens can also be used to pay taxes one day, but that has yet to happen. Cryptocurrencies are mostly seen as speculative assets that people hold for the purpose of selling at a later date for a higher price. They’re held like stocks or bonds, rather than spent like cash. So when the market is bearish, investors are likely to sell their crypto holdings and lock in gains from previous rallies.
- China and South Korea have banned exchanges and initial coin offerings (ICOs) for cryptocurrencies. The SEC has cracked down on ICOs as well. India is considering banning banks from servicing cryptocurrency exchanges. This has made it difficult for new investors to invest in cryptocurrencies, which reduced new money coming into the market.
- Historically, Bitcoin and gold prices move together during periods of economic uncertainty. When stocks rise, Bitcoin drops because investors are less concerned about having a safe haven asset. When stocks fall, Bitcoin rises because investors want to use it.
- The sell-off has come about for a variety of reasons, but the biggest has to do with South Korea’s decision to ban anonymous cryptocurrency trading accounts. The news sent the bitcoin price and other cryptocurrencies reeling. But this isn’t the first time cryptocurrencies have dropped in value amid widespread concerns over regulatory oversight and widespread speculation. And it probably won’t be the last.
- Bitcoin’s most famous promise is that it is uncorrelated with the stock market, which would mean it could be used as a hedge against downturns in the S&P 500. But when the stock market crashed in March, bitcoin went down with it.
- A large portion of cryptocurrency trading has been done on margin (borrowing money to trade). In April, one bitcoin exchange reported that 87% of its trades were done on margin. That level of leverage can lead to a sudden reversal in sentiment and a rush to sell positions.
- Bitcoin and ether have dominated cryptocurrency trading, but new coins are coming up all the time, many with faster transaction speeds or other advantages over bitcoin and ether. The rise of these new coins may be taking some business away from bitcoin and ether.
The final takeaway
Perhaps one of the biggest complications facing crypto right now is that it doesn’t have much utility beyond being an investment vehicle, or a speculative asset class. In other words, there aren’t all that many uses for cryptocurrencies outside of investing or trading them for profit. If you want to buy something with crypto like bitcoin or Ether, you can do that — but you’ll likely need to go through multiple exchanges and wallets to convert your crypto into fiat currency before using it for anything else.