Is the cryptocurrency dream dead?

What is going on in the crypto market?

It’s lost almost half a trillion dollars in less than one month.

At time of writing the market cap of all crypto is down to $348 billion. That’s a 58% drop from its all-time high of $835 billion on 8 January.

Banks are banning people from buying in. Facebook and Google are banning ads related to cryptos, and media outlets everywhere are calling time on the crypto boom.

So, what the hell is going on, and is crypto now doomed to fail?

I’m going to answer the first of those questions. After you finish reading, you can make up your own mind about the second one.

First I’ll tell you my story, because it will probably feel familiar.

I bought Ethereum right before the two biggest crashes of 2017

If you bought into crypto at any point over December or January, I can empathise. I managed to time not just one, but both of 2017’s biggest market crashes.

And by time, I don’t mean bought at the bottom and sold at the top. No, I mean bought just before each crash.

I bought Ethereum at $349 on 15 June. The next day the price crashed 60% to $141.

I lost 60% of my investment in a single day.

It would take over two and a half months before I broke even on that buy.

Then, just three days after I was finally in profit from that 15 June buy, I bought again.

I bought on 1 September, when Ethereum was at $390. Over the next two weeks its price slid 45% right back down to $213.

It would take another two and a half months before Ethereum was back over $390 again.

Those were the two biggest crashes of 2017, and I timed them perfectly.

I “lost” 60% in a day, and then 45% in a just a couple of weeks.

It took me a total of five months to break even on those trades.

Of course, we all know what happened next. By 1 January, Ethereum was trading at $780. By mid-January it was over $1,370.

Even at time of writing, in the midst of this crash, it’s still at $734. That’s way, way up on those highs I bought into.

Throughout the year I put most of my money in during the crashes, so my average buy-in price is much lower than $390. But even if it wasn’t, I’d still, even in the midst of this crash, be up 88%.

That’s the nature of crypto markets.

If you put in more than you are prepared to lose, you will end up selling low and losing money. That’s why I stress that point so much.

But, if you can keep your nerve, there’s every chance you’ll end up making much, much more than you could ever have lost.

Yes, you may be down for months at a time. As I was. But in the end, I think you’ll be glad you had money in crypto this early.

How much further does this crash have to go? Nobody knows. Will it even recover? No one can say for certain.

But look into the technology. Look into its applications. And look at the huge companies putting money into it. And ask yourself if you really think this revolution will all come to naught.

Reasons for the crypto crash

As is usual with the FOMO vs FUD cycle, there is no one reason for the FUD (fear, uncertainty and doubt) causing a crash. There are many. So let’s go through the list.

The January dip

But it’s not January any more! Yeah, I am aware of that. However, the thing that set off this crash was most likely the traditional January dip, which I wrote about in mid-January.

It’s true this happens every year, but it doesn’t usually last this long or cut this deep. So there must be more to it this year. And there is.

BitConnect Ponzi scheme exposed

Around the time of the January dip, news hit that BitConnect was in trouble.

BitConnect is essentially a Ponzi scheme, and most people knew it. As CoinDesk reported:

BitConnect has been accused of constituting a Ponzi scheme, and several figures in the space, including the founder of ethereum, Vitalik Buterin, have levied criticisms against it in recent months.

Then last week, it had its assets frozen by US investigators. Although many people believed BitConnect was a scam and welcomed this news, it did add to the general market FUD.

Next up, we have the biggest theft in crypto history

Then on 26 January $530 million of NEM was stolen from Coincheck, one of Japan’s biggest exchanges.

At the time the president of the NEM foundation, Lon Wong, called it “the biggest theft in the history of the world”.

It’s probably important to note that this hack was because of the exchange’s poor security, not because of any kind of flaw in NEM’s code.

Coincheck almost immediately put out a statement saying it would reimburse all affected customers. But the biggest theft in history doesn’t exactly inspire market confidence, does it?

Especially when, a few days later Bloomberg reported…

Bitfinex, the world’s biggest bitcoin exchange, is subpoenaed by US regulators

Now, the reporting on this one was very suspect. Bloomberg leaked the news last week as if Bitfinex had been subpoenaed last week. It hadn’t. The subpoena actually went out on 6 December.

Bloomberg later edited the story with the correct subpoena date. But the horse had already bolted.

Why is Bitfinex being investigated? It’s all to do with something called Tether. Tether is a crypto designed to be pegged to the US dollar price. It makes it easy for people to trade in and out of cryptos during market volatility, without having to withdraw their money into actual fiat.

It’s a great idea. But there is a lot of controversy surrounding Tether, and whether it actually has the dollar reserved it claims to. In theory it should hold one real dollar in reserve for every Tether it issues. The problem is, no one actually knows if it does or not. That’s what the investigation is about.

As Bloomberg reported:

The U.S. Commodity Futures Trading Commission sent subpoenas on Dec. 6 to virtual-currency venue Bitfinex and Tether, a company that issues a widely traded coin and claims it’s pegged to the dollar, according to a person familiar with the matter, who asked not to be identified discussing private information. The firms share the same chief executive officer.

It’s anybody’s guess as to whether Tether is real or a scam. Although given the subpoena was served two months ago and Bitfinex is going on as normal, it would appear they aren’t too flustered.

Maybe it’s all real after all. If it comes out that Tether is for real, we can expect a very sudden and strong market bounce. Possibly the biggest and fastest in history.

If it’s proved to be a scam… well, I guess we’ll have to wait and see.

But that’s not all!

India bans crypto. Or does it?

As crypto gets more and more popular it sucks more and more money away from banks and other intermediaries.

It’s a huge disruption to the status quo and many governments don’t like this. So they ban crypto. The big crash in September of 2017 was fuelled by China’s ban on exchanges.

Last week, India’s minister of finance, Arun Jaitley, said this:

The government does not recognise cryptocurrency as legal tender or coin and will take all measures to eliminate the use of these crypto assets in financing illegitimate activities or as part of the payments system.

Almost every major news organisation on the planet jumped on this, as you would expect.

This caused yet more FUD.

Whether the comments were misinterpreted by these news organisations doesn’t really matter. It just added to the general FUD and deepened the crash.

On Sunday, Cointelegraph stated the talk of Indian bans was simply FUD. Here’s what it reported:

Earlier this week, many reports falsely suggested that the Indian government has banned cryptocurrency trading and the entire cryptocurrency market. Cointelegraph spoke to India’s three largest cryptocurrency exchanges, which unanimously stated that the cryptocurrency ban rumors are nothing more than FUD.

In an exclusive interview, executives at Coinsecure, Unocoin and Zebpay, the most widely utilized cryptocurrency trading platforms in the country with millions of users, unanimously stated that the document released by the Ministry of Finance was misinterpreted. The India Ministry of Finance reaffirmed that it intends to ban the usage of cryptocurrencies in financial crimes and illicit activities, but not ban cryptocurrencies in general. It is important to acknowledge that the use of cash or any currency in financial crimes is banned.

The mainstream media, especially outlets in India, interpreted the statement as a ban on cryptocurrencies and released premature reports claiming the government has banned the market. This week, on national television, India’s Finance Minister strongly refused cryptocurrency ban rumors.

You can read the full article here, if you’re interested.

What will come of the India story? It’s hard to say, but it seems it’s not over yet.

And this is right after South Korea reopened its exchanges and allowed its citizens to open new trading accounts. A few weeks ago the South Korea “ban” that turned out to be nothing of the sort was all we had to worry about.

Facebook bans all crypto ads

Last week Facebook joined in the clampdown on cryptos in the name of protecting its users.

It has banned all bitcoin, crypto and initial coin offering (ICO) related ads. To be fair, with the amount of scams out there, this is probably a good thing. Although I doubt Facebook is doing it for the noble reasons it states, as I wrote about yesterday.

Yesterday Lloyds banned buying crypto on credit

And finally, we have Lloyds adding to the FUD.

It announced on Monday it will no longer let its customers use their credit cards to buy crypto. Again, this is because it wants to protect them. And it has nothing to do with the fact cryptos are a direct threat to its existence.

Honestly though, this is also a good thing. As I’ve written time and time again, you shouldn’t be putting more money into cryptos than you can afford to throw away.

If you’re buying on credit, that is the definition of not having enough spare money to use it for investing.

However, it’s just a small step to go from banning buying with credit cards to banning buying it with debit cards.

Is this Lloyds testing the water before it clamps down for real?

I hope not, but if you were Lloyds, wouldn’t you do everything in your power to crush your competition, especially if you could frame it as “protecting the public”?

Finally, all markets are down

At time of writing on Monday afternoon. All markets are down. The FTSE 100 is down over 1%. The S&P 500 and Nikkei are down over 2%. In crypto terms those drops are negligible. But in stockmarkets they are not.

Crypto markets move much faster and more violently than other markets, but they still tend to mirror their movements. They just massively amplify these movements.

So if markets around the world are down, you can usually expect cryptos to be down a lot more.

So, what happens next?

FUD breeds FUD, until it doesn’t.

As you can see from the above, there is a lot of FUD in the crypto market at the moment.

Individually any of these issues wouldn’t have too much impact, but they are all coming at once.

This may well be the best buying opportunity we will see in crypto for years to come. Or it may prove to be the start of a long, drawn out bear market. Only time will tell.

All of this bad news has vastly overshadowed the good news that has been coming out.

Over 1 million people have signed up to get early access to Robinhood’s crypto buying service in the last couple of weeks.

And just last week, Taiwan’s capital city, Taipei, announced it was partnering with IOTA to turn itself into a “smart city”.

As Cointelegraph reported:

Wei-bin Lee, Commissioner of the Department of Information Technology in Taipei City Government, suggested in an official press release that the ‘unique technology’ offered by IOTA will usher in a ‘new era of smart cities for the citizens of Taipei’.

The first project on the docket is the creation of citizen ID cards built on the Tangle technology. Called ‘TangleID’ cards, the creation is designed to eliminate risks of identity theft and voter fraud, while at the same time providing a simple means for tracking health history and other data for government-related services.

Projects like that prove the use case of crypto. As more and more take place, people will see the real potential in the crypto revolution.

Hopefully the public and the mainstream media will start to realise the vast potential crypto has, beyond just making a quick buck.

By being in crypto now, you are part of something that is already changing the world. Not many people get to participate in something like this, they merely get carried along by it.

When you look back in five or ten years, you’ll be able to say you were part of this movement from the beginning.

There’s a quote used by many different movements that’s very applicable to cryptos right now.

It’s usually attributed to Ghandi, but there’s no evidence he ever actually said it.

“First they ignore you, then they laugh at you, then they fight you, then you win.”

Right now, they are fighting us. Time will tell if we win or not.

Until next time,

Harry Hamburg
Editor, Exponential Investor

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Category: Cryptocurrency

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