What happened to the crypto market? That’s a question on a lot of people’s minds these days. After a booming 2017, the market has seen a sharp decline in 2018. So, what’s going on?
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In 2017, the crypto market was on fire. Bitcoin, the most well-known cryptocurrency, surged in value from just over $1,000 at the beginning of the year to almost $20,000 by December. Ethereum, the second largest cryptocurrency by market capitalization, rose even more, increasing in value by over 9,000% during the same period. Combined, these two coins made up over 60% of the total market capitalization of all cryptocurrencies. And they weren’t alone – a number of other digital currencies also saw significant gains in value.
Unfortunately, 2018 hasn’t been as good to cryptocurrencies. The total market capitalization of all digital currencies has fallen by over 60% since its peak in early January 2018. Bitcoin and Ethereum have both fallen by over 70%. So what happened?
There are a number of factors that have contributed to the crypto market’s decline this year. Let’s take a look at some of the most important ones:
1) Regulatory uncertainty: One of the biggest factors driving investment in cryptocurrencies is the belief that they will eventually be widely adopted and used as a mainstream form of payment. However, this adoption has been held back by regulatory uncertainty. In particular, governments and financial institutions have been slow to warm to cryptocurrencies due to concerns about their lack of regulation and potential for use in illegal activities such as money laundering and tax evasion.
2) The rise of alternative investments: Another factor that has weighed on cryptocurrencies is the rise of alternative investments such as stablecoins (cryptocurrencies pegged to fiat currencies or other assets), which offer many of the same benefits but with less volatility. Over the past year, there has been an influx of new stablecoins onto the market, including popular coins such as Tether (USDT), which has become one of the largest digital currencies by market capitalization. This has led investors to put more money into these alternatives and less into cryptocurrencies.
3) weak performance: One final factor that has likely contributed to the crypto market’s decline this year is weak performance. After such an incredible run-up in prices in 2017, it was inevitable that there would be a correction at some point. And indeed, many investors likely sold their positions during 2018 when it became clear that prices were not going to continue rising at the same rate. Combined with regulatory uncertainty and competition from alternatives, this weak performance helped push the market down further
The Mt. Gox hack
On February 7, 2014, Mt. Gox, a bitcoin exchange based in Tokyo, suspended trading, closed its website and exchange service, and filed for bankruptcy protection from creditors. The company said that it had lost almost 750,000 of its customers’ bitcoins likely due to theft. This was equivalent to approximately $350 million at the time. Cryptocurrency exchanges issue and receive digital assets on behalf of their users. To do this they hold digital assets in so-called “hot wallets” for immediate use and “cold wallets” for storage offline. On 14 March 2014, Mt.Gox reported on its website that a “decision was taken to close all transactions for the time being”, citing “recent news reports and the potential repercussions on MtGox’s operations”.
Mt. Gox issued a statement saying that it had found 200,000 missing bitcoins in old-format wallets which they no longer use. Bitcoin prices fell sharply after the report. By 9 March the price had risen again to just over $550. On 10 March Mt. Gox released another statement saying that it had gone bankrupt because of “a poorly executed security measure” which allowed hackers to access customer accounts and steal 58 billion yen (approximately US$473 million or 347 thousand bitcoins).
The hack attack caused Mt.Gox to shutter its doors for good and file for bankruptcy in Japan. Customers who had their bitcoins stored on Mt.Gox were left empty-handed while those who kept their bitcoins in other exchanges were unaffected by the debacle. The hack also caused a lot of panic in the cryptocurrency community as people were worried about the safety of their holdings. The incident also brought into question the security of other exchanges as well as the custodial storage model which many exchanges use.
The DAO hack
On June 17, 2016, an unknown attacker exploited a flaw in The DAO’s code to siphon off one third of The DAO’s funds to a Child DAO. This represented 3.6 million ethers or about $60 million at the time. The event caused a rapid drop in the price of ether, and called into question the security of Ethereum itself. In response, the Ethereum community voted to hard fork the Ethereum blockchain at block 1,920,000 in order to recover the stolen funds. This caused a split, with Ethereum and Ethereum Classic maintaining their own separate blockchain histories.
The Bitfinex hack
On August 2, 2016, Bitfinex, the world’s largest Bitcoin exchange by volume, announced that it had been hacked and 119,756 BTC (roughly $72 million) had been stolen from customer accounts. The hack represented 0.75% of Bitfinex’s total BTC holdings and led to a loss of 36% of its value. The price of BTC on other exchanges fell by 23%.
The Parity hack
On November 6, 2017, a majorhack took place in the cryptocurrency world. A hacker was able to exploit a vulnerabilty in the Parity Wallet software that allowed him to steal over $30 million worth of Ethereum from multisig wallets. This hack sent shockwaves through the cryptocurrency community and caused the value of Ethereum to drop by over 10%.
The Coincheck hack
In January 2018, Japanese cryptocurrency exchange Coincheck suffered the biggest hack in the history of the industry, losing over $530 million worth of NEM tokens. The hack sent shockwaves through the market, and is widely considered to be one of the main reasons for the crypto crash that followed.
In the past few weeks, the whole crypto market has taken a beating. Bitcoin, Ethereum, Litecoin, and most other major cryptos are down 20-40% from their all-time highs. So, what happened?
Here are a few possible explanations:
1) Regulation: One of the biggest reasons for the recent sell-off could be increased regulation from governments around the world. China, South Korea, and Russia have all recently announced plans to crack down on crypto trading. While some believe that regulation is a good thing for the long-term growth of the crypto market, it certainly has caused a lot of short-term pain.
2) Tax selling: Another explanation for the sell-off could be related to taxes. Many people who made money off of cryptos in 2017 are now selling their coins to pay their taxes. This selling pressure has been compounded by the fact that many major exchanges (like Coinbase) have recently been sending out 1099 forms to their customers, which means that people are only now realizing how much they owe in taxes.
3) Fomo (fear of missing out): Finally, it’s possible that some of the recent selling is simply due to people being worried that they’ll miss out on further gains if they don’t sell now. After such an incredible bull run, it’s natural for some people to want to take profits off the table.
At this point, it’s impossible to say definitively what caused the recent sell-off in cryptos. It’s likely a combination of all three of these factors (and possibly others). However, one thing is for sure – the crypto market is still in its infancy and there will be plenty of ups and downs along the way. So, if you’re thinking about investing in cryptos, make sure you do your research and are prepared for both the good times and the bad times.”