Why Crypto Markets Needed a Break
Last week was not a helpful one for cryptocurrency investors. Not only did bitcoin crater from its all-time highs, virtually every single altcoin suffered severe losses. Naturally, the bears and the critics are out in full force, enjoying the show with their popcorn. They win this quarter, but the game is far from over for crypto advocates.
I have full confidence that bitcoin and reputable crypto assets will, relatively quickly, enjoy a full recovery. Moreover, I don't say that just to fulfill an editorial schedule. I have skin in the game, and I refused to panic out of my position. Admittedly, it was tempting to get out while the going was good, but my reputation and integrity is more valuable.
By now, you've heard of the international threats against crypto exchanges and trading platforms. If government bodies have their way, China and South Korea will outright ban cryptocurrencies. I have my own strong views on why recent headlines are overplayed. But I also encourage you to read my colleague Dana Blankenhorn's perspective, so that you have the full picture.
Having dissected the factors impacting the crypto markets, I concluded that we still have much more room to grow. As insane and biased as it may sound, I believe that the recent downfall is a long-term benefit for cryptocurrencies.
Here are three factors to consider:
Crypto Markets Must Release Their Waste
Recently, I suffered a horrific food poisoning incident. My immediate desire was to stop the fluids from leaving my body using medication. However, I fought this temptation, and for good reason. Flushing out waste products is the body's natural way to rid itself of infections.
How does this relate to the crypto fallout? To be quite blunt, the blockchain needed a laxative. We had too many cryptocurrencies that were simply junk investments. While I believe in free markets, and the ability to make our own choices without nanny-state intervention, these digital steaming piles detracted from real opportunities.
The BitConnect scandal is a perfect example. BitConnect is (and soon to be, was) a crypto lending platform. Long story short, you invested in their digital token, for which you would receive daily interest returns averaging 1%. Theoretically, this meant that a $1,000 investment compounded daily for three years could turn into $50 million.
Don't laugh too much because real people fell for this obvious ponzi scheme. But the worst part about the BitConnect scandal is that it impugns normal, rational crypto investors. The general public is generally ignorant about bitcoin, the blockchain and cryptocurrencies. Now, an unscrupulous organization have confirmed their fears and biases. Beyond that, the Securities and Exchange Commission is getting mighty ornery.
Nevertheless, the crypto sphere has been inundated with rubbish. The silver lining in this massive correction is that we can flush out the rubbish. Hopefully, what remains are cryptocurrencies with genuine, long-term potential.
But if the only thing that happens is the eradication of scams and ponzi schemes, that's still a great development.
Crypto Markets Are Still Immature
Whether you like it or not, bitcoin is synonymous with everything blockchain. Globally, every crypto investor keeps a sharp eye on bitcoin prices, irrespective of their own target assets. Wherever bitcoin goes, so goes all cryptocurrencies.
For the past year or so, the alignment between bitcoin and altcoins was mostly favorable. As the original virtual currency kept flying to the moon, the alternates tagged along for the ride. It's hard to believe, but in early 2017, both ethereum and litecoin traded hands in the single digits. You know what they're worth today.
But in severe corrections like what we're currently experiencing, the digital market's immaturity shows. Apparently, nobody trades on each currency's fundamentals. Instead, they look to bitcoin, decide that it's getting too roughed up, and bail out.
During the fallout's epicenter, I visited Coinmarketcap.com and listed all cryptocurrencies by their day-over-day percentage change. Almost every single digital token suffered sharp losses. Only two or three no-name altcoins escaped the heat.
In the longer-term future, I believe that the crypto markets will mature substantially. Bitcoin won't necessarily be the center of the universe, allowing altcoins to seek true price discovery. By this time, the general public would be more educated about the blockchain. Therefore, we should see more rational trading patterns.
But for now, this sector's immaturity is a speculative opportunity. Maturity implies stability, which then equates to less risk, and less reward. If you still want to see crazy gains, and are willing to stomach the risk, now is the ideal time.
The Bandwagon Is Taking a Breather
One of the biggest benefits of the crypto laxative is that it incentivizes the bandwagon folks to leave. The bitcoin and altcoin markets have enjoyed their presence, but lately, things have gotten out of hand. We need the real proponents to take center stage.
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Although blockchain writers talk excitedly about the bitcoin price and its volatility, bitcoin's volume has been comparatively stable. For instance, between 2014 through the end of 2016, average trading volume amounted to approximately $48.3 million.
The quarterly high of this period was $96.7 million, while the low was $20 million, or a 383% spread.
The market picked up significant steam during the first three quarters of 2017. However, it went absolutely bonkers in the final quarter of last year, and momentum carried over into the current month. To better illustrate the insanity, between January through September 2017, bitcoin volume averaged just under $950 million. In the last four months, volume has averaged a whopping $11.5 billion.
You want to know why bitcoin corrected so severely? Essentially, we saw an 1,100% increase in monetary participation in a matter of a few months. This is simply out of control, even for bitcoin.
I'm almost certain that the pains we're suffering are resulting from newbie investors losing their nerve. Also, the people that jumped onboard late in the game panicked out, not wanting to hold the bag.
But for those of us who have been participating in crypto trading long before broader acceptance, this hysteria is nothing new. Bitcoin and the other tokens will recover, a new wave of "bandwagoners" will come in, and it will be deja-vu all over again.
As of this writing, Josh Enomoto, with the exception of the BitConnect scam, is long all the cryptocurrencies mentioned in this article.
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