2018 was the year the bitcoin bubble burst… again.
One year after Bitcoin, or BTC, exploded from below $1000 to nearly $20,000 last December 2017, the cryptocurrency has lost about 80% of its value. The dramatic fall tops the dot-com bust, when the NASDAQ Composite fell 78% over the course of two years (that said, it is still about 4x higher than where it was 2 years ago). Meanwhile, the rest of the crypto market has largely followed BTC’s lead: the market capitalization of all digital currencies is now hovering around $134bn versus $800bn earlier this year.
For veteran cryptotraders, the following intro from Goldman will be redundant but here it for those who may have slept through the bitcoin mania days of late 2017 and early 2018: BTC remains the largest cryptocurrency, commanding more than half of crypto’s total value. Ripple (XRP) — which is meant to facilitate digital payments — and Ethereum (ETH) — the unit of value on a platform that allows for the creation of “smart contracts” — are the second- and third-largest players, respectively. While the cryptocurrency sell-off was broad-based, those intended to function as a store of value (e.g., BTC) appeared to fare better than “utility tokens,” such as those operating on the Ethereum platform.
Negative headlines likely contributed to crypto declines. While it’s difficult to pinpoint a single driver of crypto’s struggles, a number of negative developments surfaced this year according to Goldman, among which were a series of high-profile hacks of cryptocurrency exchanges, including Japan’s Coincheck and South Korea’s Coinrail. The Wall Street Journal reported that nearly one in five initial coin offerings (ICOs) showed potential signs of fraud. And questions surfaced about the reliability of Tether, a so-called “stablecoin” meant to be backed one-to-one by US dollars.
Regulators also stepped up scrutiny, and no crypto ETF made it to market despite an aggressive push. At the same time, the US government took an active role in the crypto space throughout 2018. For example, the SEC initiated a broad inquiry into the structure of sales and pre-sales of digital tokens beginning in February. Months later, the Commodity Futures Trading Commission demanded more transparency from BTC exchanges, while contributing to a criminal probe into price manipulation among crypto traders. All the while, the SEC turned down multiple attempts to create a BTC exchange-traded fund amid ongoing concerns over custody and surveillance of the underlying asset.
But this biggest disappointment for crypto enthusiasts is that involvement of traditional institutional investors remained limited in 2018 despite much hype and promise. While BTC futures gained some early traction post their launch on US exchanges in December 2017, open interest and trading volumes have faded since.
In addition, crypto funds have been under substantial pressure (with several shutting), given the sell-off while bitcoin mining profitability and hash rates have collapsed, as many bitcoin miners have gone out of business.
That said, some major banks — including Goldman — announced this year that they are looking at establishing trading desks with a focus on crypto assets.
Despite the crypto carnage of 2018, blockchain technology made some (quieter) gains. While the buzz surrounding blockchain technology seemed to fade in step with the crypto sell-off, a number of companies continued to introduce initial blockchain prototypes. And several banks — especially those in Asia and Latin America — expressed interest in using Ripple’s technology. One notable announcement was the Australian Securities Exchange’s decision to establish a blockchain-based platform to facilitate the clearing and settlement of cash equities, among other functions. The company has since delayed implementation until the first half of 2021, though it still intends to move forward with the project.
Meanwhile, talk of central bank digital currencies continued over the course of 2018, with institutions such as the Bank for International Settlements and the International Monetary Fund dedicating increasing attention to the potential role of central bank digital currencies (CBDCs) in monetary policy, market structure, and payment systems.
* * *
Yet while the bitcoin bubble may have burst, it won’t be the first time, and it certainly won’t be the first time bitcoin was left for dead (see the charts below) comparing the 2013–2014 and 2017–2018 bubbles.
So what can fans, fanatics, critics, cryptotraders and the general public look for in 2019 (and beyond) according to Goldman Sachs?
- Continued efforts to expand institutional involvment. Nasdaq may list BTC futures contracts sometime next year, and regulators will also consider new ETF applications, with at least one SEC review pending for early 2019.
- Further regulatory scrutiny. The SEC has has begun to crack down on unregistered ICOs in what appears to be a broader effort to regulate cryptocurrecies like traditional securities.
- Broader adoption of blockchain technology. Although blockchain technology will continue to evolve, it has the potential to have a major impact across industries (e.g., peer-to-peer transactions and the clearing/settlement of securities). That said, Goldman expects limited adoption of early-stage blockchain prototypes in the next one to three years. However, broader acceptance is still likely to take a decade or more.
Finally, here is an annotated history of bitcoin prices during the first and second bitcoin bubble. We eagerly look forward to the third, and most violent one.