From Riches to Rags: Have Cryptocurrencies Crashed for Good?

Last year, cryptocurrencies made headlines as their value continued to rocket up, reaching a high of around $20000 in December. Bitcoin has recently drifted from the public spotlight, but not before its value crashed drastically in the space of a few months at the start of 2018.

During the rallies of 2017, the popularity of cryptocurrencies meant that they started to have an effect on real economies. Many companies with publicly traded stocks made decisions that showed that they stood to benefit from cryptocurrencies. Markets, in turn, rewarded them for this.

For example, Bloomberg reports that Longfin Corp witnessed a stock rally of over 2,000% in a week after announcing it had purchased a "blockchain-empowered global micro-lending solutions provider." As this rally spread from bitcoin to other cryptocurrencies, and as companies such as Longfin Corp touted their links to them while bidding for resources in the real economy, it’s evident that cryptocurrencies started to have an economic impact in the real world.

However, for such a powerful, potentially disruptive innovation, bitcoin’s downfall (and that of other popular cryptocurrencies like ethereum) in terms of value was even swifter than its ascension. With bitcoin now hovering around a value of $6000, could this be the end of cryptocurrencies? Here are some considerations.

The Downfall

Towards the end of 2017, articles emerged about how one bitcoin would one day reach a value of $1 million. This seems like a distant dream now, but it does show how much hype there was surrounding cryptocurrencies at the time. It was this same hype which fuelled speculation, and caused novice investors across the world to pile their money into cryptocurrencies in the hopes of making their fortune.

This led to a huge bitcoin bubble, which propelled cryptocurrencies well beyond a stable value, and eventually led to the infamous crash. Now that their value has plummeted, and the hype has died down, it is difficult to see how cryptocurrencies could recover.

Regulation/ICOs

Part of the reason cryptocurrencies ballooned in value in the first place was because of their deregulated, decentralised nature. This means that their value is governed solely by supply and demand, making them incredibly volatile. Any hint of regulation, as was the case when China banned ICOs, was sure to adversely affect their value by denting investor confidence.

ICOs were a popular, new fundraising model used by some startups across the world, which allowed them to issue investors bitcoin as shares or ‘tokens’ of their business in exchange for funding. With China having a significant market for bitcoin, this almost certainly helped to bring about cryptocurrency’s downfall (as did regulation in other countries).

Is Cryptocurrency Dead?

Craig Erlam, a Senior Market Analyst at Oanda, was asked if we are watching the great crypto funeral, and had this to say:

“I don’t think we’re seeing a crypto funeral, more so the consequences of a late-2017 rally that was built on little more than hype and the hope of easy profits. We have to remember that even at the current levels – around $6,000 – the price of bitcoin is up more than 500% from the start of last year, which is hardly a bad return.”

This certainly seems to ring true, and it is still worth remembering that, at its inception, bitcoin was barely worth a few cents. As such, many investors will likely be evaluating the future potential of cryptocurrencies.

The Resurgence?

If one thing has become clear with cryptocurrencies in the last few years, it’s that their future is shrouded in uncertainty. Conversely, it is clear that cryptocurrencies have made their mark on the world stage, and the revolutionary technology which underpins cryptocurrencies, blockchain, already has its own market set to be worth $12.48 billion by 2025.

It could well be the case that, despite the huge (burst) bubble, cryptocurrency’s journey is only just beginning. If more businesses across the world accept it as payment, and fears about regulation subside, then it has every chance to once again rise to the top as an investment choice.   

Central Banks

With cryptocurrencies having the potential to be such a major disruptive force in the world of economics and politics, it may seem surprising that many central banks around the world, such as Sweden’s Riksbank, have considered creating their own digital currencies. This would help them to stay afloat in a world which relies less and less on physical cash, and could be a necessity in the future.

If cryptocurrencies were to be widely adopted as legitimate means of payment around the world, then the current global financial system would almost certainly change in the years to come. Since most central banks issue mainly banknotes and coins to the public, the issuing of digital cryptocurrencies instead would mark a significant change in monetary policy, although no one would realistically be able to predict what the long term economic effects of this may be. Even the fact that central banks are debating the adoption of cryptocurrencies, though, is noteworthy.

Despite the misfortune of cryptocurrencies at the end of 2017, they do not appear to be dying. If anything, the bubble has shown just how much potential they have to become both valuable and useful in the near future. As such, it may be a good idea to keep an eye on their value in the coming years.

Further reading:

• Is this the beginning of the end for Bitcoin?
• 21 experts tell us what the future looks like for cryptocurrencies and blockchain

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Date: July 26, 2018