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This article first appeared in Capital, The Edge Malaysia Weekly on February 12, 2018 - February 18, 2018

TWO months into 2018, the cryptocurrency market is conquering headlines, with most — if not all — of the blockchain assets plunging from their all-time high prices at the end of 2017.

As usual, any big decline in prices sparks discussions on whether the metaphorical bubble has popped, as has happened a number of times since bitcoin (BTC) was created about a decade ago.

BTC, the first cryptocurrency and the largest digital asset by market capitalisation, plunged to a three-month low of about US$6,000 early this month after peaking at an all-time high of nearly US$20,000 in December.

Ethereum (ETH), the second-largest digital asset by market capitalisation, fell 60% to US$570 from the peak of about US$1,420 on Jan 13.

ETH was briefly overtaken by Ripple (XRP) as the second largest cryptocurrency when the latter’s price hit an all-time high of about US$3.30 on Jan 4 after trading sideways at about 25 US cents in early December.

XRP was not spared from the market-wide sell down and fell to a two-month low of 58 US cents on Feb 6.

Based on data by Coinmarketcap.com, which tracks over 1,500 digital assets, the total market capitalisation of the cryptocurrency market topped out at US$827.68 billion on Jan 7 but plunged to US$279.02 billion on Feb 6.

The market has seen a slight recovery since then, with total market capitalisation standing at US$399.37 billion on Feb 9. Despite the recent correction, the market capitalisation of the digital asset space grew 83% from US$218.81 billion last February.

At last Friday’s close, BTC, ETH and XRP were trading at US$8,246.22, US$823.52 and 80 US cents respectively.

While many say the cryptocurrency bubble has popped, Ripple India managing director Navin Gupta says the recent plunge was not a crash. “I would not call it a crash. These are market dynamics at play. The market always swings between greed and fear. There was so much exuberance in the market one month ago and now someone is calling it a crash,” he tells The Edge.

While the volatility in the price of digital assets has garnered more attention from speculators than the technology and use cases behind the cryptocurrencies, Navin says it helps bring adopters into the market.

“It’s like the dotcom boom, right? Had the boom not happened in 1999, no one would have known about Google, or Yahoo, for that matter. Of course, the valuation of these companies’ earnings came much later on,” he says.

A market observer points out that the cryptocurrency market tends to plunge in the earlier part of the year, usually in January. This has happened over the past four years.

Some have speculated that the annual January sell down could be due to profit-taking activity ahead of the Chinese New Year, as China accounts for a major portion of trading activity in the digital space.

Considering the tremendous gains over the past year, the slew of negative news in the media had also spooked speculators. There were also misreporting by the mainstream media — such as stories of the banning of cryptocurrency trading in India and South Korea.

In India, media outlets widely reported that Finance Minister Arun Jaitley had stated that cryptocurrency was illegal in his budget speech on Feb 1, although he had stated only that digital currencies are not legal tender — a stand that is similar to Malaysia’s and almost all other governments globally.

In South Korea, the media reported that the government was looking at an outright ban, amid conflicting comments from government officials. Finance Minister Kim Dong-yeon has since clarified that the government has no plans to ban trading. However, regulators around the world are looking at tightening regulations.

Although these misreports have since been clarified, sentiment has been affected as a major portion of digital “investors” are unsophisticated and tend to be very sensitive to news flow, regardless of accuracy.

Another big event that affected sentiment was news of another major hack — at Japan-based cryptocurrency exchange Coincheck.

The heist on Jan 26 saw some US$530 million in NEM coins going missing from customers’ wallets, which led Japan to carry out a series of raids on a number of other exchanges in the country to examine their internal governance structure.

While the attackers have yet to be identified, South Korea’s National Intelligence Service has said it is possible that the attack originated from North Korea but did not elaborate further.

Meanwhile, global consultancy firm Ernst & Young highlighted in a report that more than 10% of the US$3.7 billion of funds raised through initial coin offerings (ICOs) in 2017 have been stolen by hackers.

“Hackers benefit from the hype irreversibility of blockchain-based transactions and basic coding errors, which could have been avoided had the ICOs been carefully reviewed by experienced developers and cybersecurity analysts.

“Funds are misappropriated via substituting project wallet addresses (phishing, site hacking), accessing private keys and stealing funds from wallets, or hacking stock exchanges and wallets. All on top of indirect losses caused by high reputational risks for project founders,” said EY.

Several notable figures have also given their views on cryptocurrencies, including World Bank group president Jim Yong Kim, who said that the World Bank is looking closely at the usage of cryptocurrencies. “In terms of using BTC or some of the other cryptocurrencies, we are also looking at it, but I’m told the vast majority of cryptocurrencies are basically Ponzi schemes.

“It’s still not really clear how it’s going to work,” he reportedly said.

Meanwhile, Goldman Sachs head of global investment research Steve Strongin was quoted as saying it is unlikely that any of the digital currencies will survive in the long run, drawing comparisons with the internet bubble in the late 1990s. However, “… parts of them may evolve and survive. Because of the lack of intrinsic value, the currencies that don’t survive will most likely trade to zero.

“In hindsight, this period will probably end up looking like the internet bubble of the late 1990s. Very few companies that existed then went on to become even more valuable. Amazon did, but in a completely different form. Google — a big winner today — had only just been formed at the time,” he said.

Bank for International Settlements general manager Agustin Carstens has warned authorities and regulators around the world not to underestimate the impact cryptocurrencies can have on financial stability.

“Many judge that, given the cryptocurrencies’ small size and limited interconnectedness, concerns about them do not rise to a systemic level.

“But if authorities do not act preemptively, cryptocurrencies could become more interconnected with the main financial system and become a threat to financial stability,” said Carstens.

 

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