This article first appeared in The Edge Malaysia Weekly on December 31, 2018 - January 6, 2019

THE cryptocurrency market has tanked over the past year, with digital assets erasing close to US$700 billion in market capitalisation, according to CoinMarketCap data — a sharp reversal since the digital assets touched record high prices late last year amid the initial coin offering (ICO) craze two years ago.

At its peak, bitcoin (BTC) — the first and most widely used blockchain-powered asset — traded at highs of near US$20,000 in December 2017, before seeing a sharp decline over the past 12 months, touching lows of about US$3,200 this month.

In total, the market capitalisation of cryptocurrencies had plunged 87% to US$104.42 billion as at Dec 17, compared with US$800 billion in January this year.

The selldown of cryptocurrencies since the start of the year has been attributed to several factors, according to StashAway chief investment officer Freddy Lim, including the generally weaker global investment sentiment.

StashAway is a robo-advisory platform that has just launched its services in Malaysia.

“On the macro level, we have the policy tightening by the US Federal Reserve and this has had a very big impact on alternative investments, which includes the cryptocurrency space,” he tells The Edge.

He also notes factors specific to the cryptocurrency markets, which is the division, or forking, of Bitcoin Cash (BCH), the fourth largest cryptocurrency by market capitalisation at the time of the division in November, into two cryptocurrencies — Bitcoin Cash ABC and Bitcoin SV.

The split of BCH’s blockchain happened due to a disagreement between two factions of developers on how the cryptocurrency should be developed going forward, which seems to be a recurring theme in the world of bitcoin.

BCH itself was created via a fork of the BTC blockchain in August last year, also due to a disagreement on the way forward.

“The BCH fork created a bit of disruption for some investors and affected sentiment on BTC as well. There are two camps, Bitcoin Cash ABC and Bitcoin SV, and investors now have to choose sides. If they pick the wrong side, they stand to lose significantly,” says Lim.

Prior to the fork, BTC was largely trading sideways at around US$6,500. On Nov 15, which is the day of the fork, BTC dropped 15% in value to trade at around US$5,500 before triggering a continued plunge to below the US$4,000 mark.

At the time of writing, BTC traded at US$3,885, down 72% year to date.

Mati Greenspan, senior market analyst at trading platform eToro, says cryptocurrency prices got “ahead of the curve” in 2017, but the sharp correction seen since the start of this year is nothing out of the ordinary.

“BTC tends to go through defined bull and bear cycles. The bull runs can often lead to gains of 1,000% and more in just a short time but it is normal for there to be a large pullback after a move like that, sometimes even 80% or 90%, which is what we are seeing now,” he says.

Apart from the fork, in June, Facebook and Google banned all crypto-related advertising while the US Securities and Exchange Commission had denied the listing of several cryptocurrency exchange-traded funds.

Governments and regulators around the world are also looking at regulating cryptocurrency-related activities, including in Malaysia, where the Securities Commission Malaysia and Bank Negara Malaysia will jointly implement a regulatory framework on issuances and trading of digital assets in the first quarter of 2019.

This is also particularly important, as there has been a rise in cryptocurrency and ICO activities in Malaysia, given Country Heights Holdings Bhd’s proposed ICO of its Horse Currency tokens and Federal Territories Minister Khalid Abdul Samad’s proposed Harapan Coin.

To those unfamiliar with the space, it may seem like the excitement about cryptocurrencies is diffusing, but those involved in the industry say it is still early days for the cryptocurrency market.

Polytree Labs CEO Terry Wilkinson, who is also the technical adviser of Estonia-based digital asset exchange Tubi Exchange, says the current downward trend of the market is a normal occurrence in cryptocurrency markets.

Wilkinson says there have been three similar price crashes since BTC commenced operations in 2009, each time resulting in a devaluation of more than 83%.

If the recent plunge in prices is seen as a popping of the cryptocurrency bubble, he says he is glad it is over with so the market can move on to build a sustainable industry.

“All of these downturns eventually recovered and went on to reach all-time highs. The current crash is just the first large downturn that mainstream investors were a part of.

“Quite contrary to being the end, it is still the beginning. Digital asset markets are still relatively small and, as such, they are subject to price volatility. However, as the markets grow, this will become less so since larger markets have greater volume and liquidity,” he says.

Meanwhile, he says, digital assets have established themselves as an alternative investment, which will not change.

Wilkinson also points out that blockchain as a technology is continuing to see large interest and tangible uptake in the enterprise and government sectors.

“Generally, this kind of downturn is good for the industry since it puts natural pressure on poorly performing companies and eventually forces them out of the market, leaving the industry with only those companies that can generate revenue and remain productive and healthy,” he says.

Similarly, Luno Southeast Asia regional manager David Low believes the cryptocurrency market is here to stay, especially as governments are pushing for regulation, which should attract bigger players. Luno is a London-based cryptocurrency exchange that also operates in Malaysia.

Based on news developments in the industry throughout this year, he says there has been growing interest in cryptocurrencies from big financial players and institutions.

“The cryptocurrency market is unique in the sense that prior to this, most of the demand was by retail investors — the average person on the street. While there has been a lot of panic around the price and in the mainstream media, many institutions have quietly been making their entry into cryptocurrencies.

“We believe the cryptocurrency market is here to stay, with more and more people recognising that it is a legitimate asset class. With the impending regulations, the market will only continue to grow as cryptocurrencies enter the mainstream,” says Low.

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