Cryptocurrencies crash as Bitcoin falls back to $10k

Yesterday saw a major wide scale sell-off in cryptocurrencies with market leader Bitcoin shedding almost 20% of its value to post its largest ever daily loss. The Pound remains well supported against the US dollar and managed to eke out another post-Brexit high above 1.38 overnight whilst the FTSE is attempting to avoid a third straight day of losses.

Regulatory threat takes the air out of Cryptos

The panic-selling seen across all the major cryptocurrencies could be attributed to a possible regulatory clampdown in South Korea with authorities threatening to place an outright ban on cryptocurrency trading. Having said that, this narrative has been around for many weeks now and isn’t really new but it has once more raised the spectre of tighter regulation on this market, which has in many ways been a victim of its own success in attracting the unwanted attention of regulatory authorities after the scarcely believable gains seen last year.

Has the bubble burst?

There have been numerous occasions when a sell-off in Bitcoin has prompted non-believers to rush in with declarations of the speculative bubble bursting, and each time they have been wrong. However, much like the boy who cried wolf it would be foolhardy to dismiss their arguments out of hand with the current market valuation still assuming a massive increase in future adoption that at present remains, at best, a pipe dream. With a Bitcoin transaction currently costing in excess of £20 and 99.9999% of vendors not treating it as legal tender there remains very real concerns as to its efficacy as a currency. Crypto bulls will no doubt remain steadfast in their belief that this latest decline presents a great buying opportunity but they are in very real danger of getting badly burned with a substantial further decline ahead entirely feasible.

How low can it go?

Let’s not forget that Bitcoin was trading at less than $8000 back in November when a much needed software upgrade (SEGWIT2X) was suspended rendering the currency practically redundant for the majority of transactions. Following this, bulls changed tact and claimed that Bitcoin had become a digital Gold which didn’t require desirable transactional attributes as it was a store of value. This argument breaks down pretty quickly upon closer inspection as anything that rises by around 2000% in a year and then subsequently loses close to 50% of its value in less than a month is hardly a good store of value. A failure for buyers to step in at these levels will lead to further declines ahead with a move back below $6000 a possible target from a technical point of view (a head and shoulders formation with the neckline at 12750 would target 5922 from a “textbook” point of view). Whilst the gains last year were rapid an old trading adage that markets tend to take the stairs up and an escalator down could well ring true and if there is a rush for the exit door then even greater declines are very possible with July’s low below the $2000 handle not out the question.

The beginning of the end for Crypto?

Given the latest price action there are now a growing number of people who will be calling the beginning of the end for Cryptocurrencies but even if the market plummets severely this isn’t necessarily the case. An apt historical analogy may be that of the .com bubble around the turn of the century when traders piled into tech stocks with reckless abandon and drove valuations sky-high. The bubble burst in due course with the vast majority of the gains on the NASDAQ index handed back and several companies that were the darling’s of these investors going out of business. What is perhaps more important to take away from this episode is what happened next, with hugely successful tech companies such as Google and Facebook being created in the years that followed. Rather than the beginning of the end, the bursting of the .com bubble in fact marked the end of the beginning and a similar phenomenon could happen in the crypto space. The Blockchain revolution could well have large and lasting impacts on many aspects of business and whilst it is unlikely to ultimately match the internet in its revolutionary scope it could well be looked back upon in the years to come as a major technological development. Just because a speculative fervour drove valuations wildy out of line doesn’t make these technological developments any less impressive, and a subsequent realignment would likely be welcomed from a long term perspective, serving to weed out the coins and companies that have sought to make a quick buck and allowing the better ones to ultimately prosper. ​