Crypto market got you down?
Don’t worry. It is not as bad as you think.
While cryptocurrency prices remain volatile, experiencing a downward trend this past month, crypto investors remain hopeful.
Both bitcoin (BTC) and ethereum (ETH), the top two active crypto assets in the market, have experienced sharp declines this past month. The BTC price has gone from about $7,700 to $6,700 with a high of roughly $8,200. ETH has seen the most dramatic price change starting at $450 and continuously moving downward to about $270. Such price lows are in sharp contrast to its high of about $1K back in January 2018.
Why is this happening and how are investors responding to the price change?
To shed light on these issues, Coindesk released its Q2 2018 State of Blockchain [1] report a few weeks ago. The report reveals how much investors believe in the future of crypto assets and its underlying blockchain technology amidst price volatility.
What is causing the price decline?
According to the report, the top two reasons are traders shorting the market and prices rebounding from prior over-speculation.
In a new and rising market, such causes of price decline are not unlikely. The former can be seen primarily as a result of traditional ‘big money’ investors who have worked to undermine the adoption of cryptocurrencies. Such action is either because of fear in its disrupting technology or because of a firm belief in its decline, while at the same time profiting off of its existence. The latter can occur when the price of an asset rises so much that it stretches the purchasing power of the market so that it is no longer as rewarding to buy in. This price rebound was seen when BTC surpassed the 10K mark in December 2017 and then sharply declined after that.
As a result of these two causes, one could assume that the crypto market bubble popped and those who owned crypto would sell off. Surprisingly, that is not what occurred. The Coindesk report states that 78% of crypto owners decided to HODL (or hold) their position while 11% moved their holdings into a stable coin instead of taking a fiat position during the price decline.
Why HODL?
Belief.
The overall sentiment of bitcoin remained positive at 70% with a majority of those surveyed continuing to see bitcoin as a hedge against central bank monetary policies. The most significant issues with bitcoin cited in the report are its scalability and use as a medium of exchange [1].
Similarly, with ethereum, sentiments remained positive at 66% citing similar scalability concerns. 64% continue to trust the leadership of ETH while only 7% have lost trust [1].
So, why HODL and not spend BTC or ETH? There are varying responses to this question. Many of which claim that the infrastructure to accept cryptocurrency is not yet mainstream and as a result, it is difficult to find ways to utilize one’s crypto assets. While this claim is valid to move towards mainstream adoption, Jeffrey Wernick, an early investor in Uber and Airbnb reminds us of the original purpose behind the creation of bitcoin — the existence of “bad money”.
According to Wernick, who invested in BTC back in 2009, “the fact that people aren’t actively spending their bitcoin is not a sign of weakness or due to the cryptocurrency’s limitations . . . people aren’t spending their bitcoin because it is “good money” that they value more than the dollars it can be traded for” [2]. Creating a form of “good money” was the purpose of bitcoin’s rise during the 2008 financial crisis that reverberated across the globe. At the same time, it is important to remember that there are many nations around the world whose currencies have crashed leaving its citizens helpless in their economies. The Venezuelan bolívar, Zimbabwean dollar and more recently the Turkish lira are just a few examples.
Investments in cryptocurrencies continue to rise
Not only are people continuing to HODL their investments but further investments into cryptocurrency and its underlying blockchain technology continues to rise. Participation in Initial Coin Offerings or ICOs has seen a 3% gain from the previous quarter continuing to outperform traditional venture capital funds. Given this, VC funding has also increased into the blockchain space from $156 million in January 2018 to $634 million raised in June 2018. On the consumer side, 72% agree that merchant adoption of cryptocurrencies will increase in 2018. [1]
Development of crypto infrastructure increases
According to Huobi Blockchain Big Data’s Weekly Insights, Github activity for BTC and ETH continues to dominate the crypto space, with ETH rising above all other cryptocurrencies in its developer activity. [3]
A rise in Github activity shows the commitment of the developer community to continue to create the infrastructure needed for mass adoption. Focusing on developing the products that will enable the greater utilization of crypto assets is fundamental for the growth of the market. What this means for the price of these assets in the interim is still unclear.
In a recent Interview with Bloomberg, Joseph Lubin, co-founder of ethereum, argues that price volatility should not be the measure of the crypto market. Since technology is growing at an exponential rate, Lubin says, we have experienced not one market bubble, like the dot-com era, but six. He goes on to state that “[w]ith each of these bubbles we have a tremendous surge of activity and that’s what we’re seeing right now”, the focus on developing core infrastructure for greater adoption regardless of price volatility by “trader types” [4].
Overall Lubin’s words seem to hold true. Belief and participation in the future of the crypto marketplace have remained resilient despite the recent drop in prices. It will be interesting to keep an eye on where the industry goes from here.
[1] Coindesk. 2018. [https://www.coindesk.com/research/state-of-blockchain-q2-2018/]. Accessed August 24, 2018.
[2] Chin, K., Frank, J., Newhard, A. 2018. [https://www.businessinsider.com/greshams-law-explains-why-no-one-spending-their-bitcoin-2018-7]. Accessed August 24, 2018.
[3] Huobi Blockchain Big Data Weekly Insights. 2018. [https://medium.com/@huobiresearch/huobi-blockchain-big-data-weekly-insights-10-9e116c10f319]. Accessed August 24, 2018.
[4] Russo, C. & Schatzker, E. Bloomberg. 2018. [https://www.bloomberg.com/news/articles/2018-08-14/ethereum-co-founder-lubin-says-speculators-driving-price-swings]. Accessed August 24, 2018.
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