Cryptocurrencies took quite a hit in 2018 and have not been a good year for the market so far. Having reached a valuation of $834 billion as of January 7, 2018, CoinMarketCap reported that the market witnessed a drastic plunge of about 66%, losing over $553 billion. Bitcoin recorded a huge loss of over 50% in February, with valuation dropping below $7,000. Ethereum and Ripple also suffered similar drops, both recording losses of over 40% during the same month. Even as of late March, the leading currencies have not bounced back as of March 21, 2018.
Most signs point to a bubble. Market speculation that drove prices to an untenable price for the time being. This bubble was exacerbated by the unregulated nature of cryptocurrency. For example, banks are required to physically hold a certain amount of cash in reserve, also known as Regulation D, which allows for an amount of liquidity in the market in case of lean times. Given the unregulated nature of cryptocurrencies it is possible that market manipulation was also behind the plunge. In 2013, Bitcoin rose from $150 to $1,000 within a period of 2 months. A rise that researchers have found was caused by one person. Last month, one anonymous investor bought $400 million in Bitcoin. For securities transactions such as stocks and bonds, the identities of the buyers and sellers are known and recorded. In cryptocurrency transactions, the transaction is known but not the entities.
However, to understand a little about what is happening, it helps to understand what cryptocurrency is.
What is Cryptocurrency?
According to Wikipedia:
A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets.Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies. Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems. The decentralized control of each cryptocurrency works through a blockchain, which is a public transaction database, functioning as a distributed ledger.
Bitcoin, created in 2009, was the first decentralized cryptocurrency. Since then, numerous other cryptocurrencies have been created. These are frequently called altcoins, as a blend of alternative coin.
That is a lot to digest so to summarize and generalize: cryptocurrency is an electronic asset that is created through among other methods, “mining” (the details of digital asset creation go beyond this post). Once this digital asset is created, a record of its created is added to a decentralized ledger. This ledger is known as a blockchain. Blockchain is like a title chain in real estate; everyone knows who owned it in the past and who owns it now. Furthermore, transactions using cryptocurrency is also recorded in the blockchain.
The blockchain is starting to look more useful than the actual cryptocurrencies, but more on that in a future post.
Differences from other currencies
Crypto isn’t going away but probably won’t replace sovereign currency because it doesn’t have that backing of an entire nation. There’s more power when you have a nation that promises the worth of something vs many individuals that aren’t a cohesive entity
A nation has natural resources, a military, existing contracts, labor forces, etc. that can be used to back the value of their currency. Crypto does not. They are kinda like fidget spinners. Some people highly value it and trade it but not likely to replace dollars.
Similarities to commodities
More than a “currency” cryptocurrency seems to have properties similar to commodities such as silver in that people can “mine” it too. That said no government uses, say rubies, as their official currency.
Cryptocurrencies are also relatively unregulated like commodities. Beyond futures contracts and derivative markets the industry did not see much action beyond the Commodity Exchange Act of 1936. Other than a few laws, regulatory bodies such as the Commodity Futures Trading Commission did not see much action until Dodd–Frank was enacted in response to the 2008 financial crisis.
For the reasons mentioned, it seems like a judge also agrees that cryptocurrencies are commodities. Maybe it is time to call them cryptocommodities.
Are Cryptocurrencies here to stay?
Probably not going away but many hurdles block mainstream adoption. Of course, if a government officially recognizes it then it’s all systems go. For now, China says no and S. Korea is hesitant. Furthermore, Warren Buffett considers cryptocurrencies speculative.
Cryptocurrency will probably end up like precious gems and metals; worth something but will not upend sovereign currency. Buying a car in wheat is possible but not as convenient as with traditional currencies. Although some dealerships accept some cryptocurrencies.