Putting the cryptocurrency bear market into perspective
In a market that has seen its fair share of thrills and spills, what are investors doing to brave a crypto winter?
AS THE saying goes: "What goes up must come down." This idiom rings especially true as the cryptocurrency economy hits a bear market. Following a surge in valuations and market cap growth in 2017, cryptocurrency markets have suffered a steep decline since early this year.
While vertiginous swings are not unfamiliar territory in this emerging financial market, the beginning of 2018 signalled a drastic turn of fortunes as crypto markets fell.
The current total market cap for cryptocurrencies is at about US$115 billion - down from US$400 billion since the market peak almost one year ago.
Behind the descent
The crypto gold rush of 2017 witnessed enormous gains and rising prices daily, attracting an influx of funds at an unprecedented velocity. This tremendous surge resulted in an unsustainable growth that was not healthy for the industry. Along with China's ban on initial coin offerings (ICOs) and hard-line approach to crypto exchanges, South Korea's ban on anonymous cryptocurrency trading has left a major impact on the global cryptocurrency markets.
Given that speculation plays a part in the price of cryptocurrencies, laws or economic decisions made in major crypto hubs tend to result in price swings and fluctuations in the overall value of cryptocurrencies worldwide. Increased pressure on ICOs and pre-emptive bans from regulators led to a ripple effect of crackdowns and general anxiety within the market, which in turn drove market volumes and valuations down.
The silver lining
In a way, the dramatic rise and decline in crypto valuations have corresponded with increased interest from institutional players, governments, and regulators. Despite a crackdown on ICOs, regulators have facilitated conversation and a forum for various opinions and concerns regarding the market. Christine Lagarde, head of the International Monetary Fund, said that the involvement of central banks is an important step in preserving the integrity of the nascent industry and managing the risks associated with privately managed digital currencies.
By bringing in measures to enforce legitimacy in a market otherwise infamous for its volatility, the industry aims to make it easier for traditional financial players and institutions to feel comfortable entering and participating in the emerging world of cryptocurrency.
At the same time, falling prices also serve as a cautionary tale for those who were quick to ride the crypto wave from fear of missing out, and a stark reminder for future investors to be mindful when it comes to making investment decisions, to carefully assess the risks before diving in.
Quality over quantity
The year-long bear market notwithstanding, prudent blockchain companies remain unfazed by the overall state of the market. This transition from crypto mania to blockchain stability means that most projects now come with not only good intentions but far-reaching solutions. At the same time, investors can invest more time in researching and understanding the technical backbone and infrastructure of a project. Taming the ICO whirlwind, the market decline reduced the number of projects that emerged purely with the intention of earning a quick win while the market was at its peak.
In an almost Darwinian fashion, the ongoing bear market will likely weed out the weakest projects, leaving only the strongest and most innovative projects to survive. It also pushes existing blockchain companies to follow through with continued improvements and deliver on their promised products, showing that negative market trends can conversely bring out the best in companies, especially for those that are tough enough to endure the test of time.
What's on the horizon
In the end, the price of cryptocurrency is not the primary indicator of success or failure. What is often overlooked by media and market analysts is that the actual use of cryptocurrency continues to grow despite the drastic drop in prices. This is not just a step but a leap in the right direction towards the shared goal of mainstream adoption.
For instance, financial inclusion is one of the key areas witnessing a surge in adoption, particularly in low- and middle-income countries (LMICs) within Latin America and Africa that have limited access to financial services. While hyperinflation is driving crypto demand in some developing regions, cross-border payments and transactions are also witnessing growth as we transition from virtual solutions to real-world application.
As the global crypto ecosystem continues to mature, projects that go on to evolve in parallel with the industry are the ones most likely to see success. While it can't be said for certain if or how soon the market will recover, new regulations and growing infrastructure are paving the way for more promising projects on the horizon, a comforting sign that the reign of cryptocurrencies is one that extends beyond the vacillating market.
