Those who have invested in cryptocurrencies understand how volatile the markets can be. Although 2017 was an excellent year for crypto investors, there were still moments of fear and panic, especially with a sell-off during the holiday season. It appears that many of those fears have continued into 2018. With potential regulations looming, crypto markets have had a very bearish start to the year.
Cryptocurrency Market Cap
The overall crypto market cap shrunk drastically after posting record-highs toward the end of 2017. One of the most troubling days this year occurred on February 5, when the crypto market cap retreated below $400 billion. On this day, all but three of the top-100 cryptos posted 24-hour declines. As a result, the total cryptocurrency market cap fell to $363 billion, losing $52 billion in value.
The 13 percent single-day pullback also caused Bitcoin, and many other cryptos, to reach their 80-day lows. Unfortunately, the selling did not stop there. Recently, the cryptocurrency world discovered that one of the reasons for the recent slump was because a Mt. Gox Trustee, Nobuaki Kobayashi, sold over $400 million in Bitcoin (BTC) and Bitcoin cash (BCC).
Kobayashi sold his crypto holdings to pay back creditors who lost money during the collapse of the now-defunct Mt. Gox exchange. The Mt. Gox exchange went under in 2014, when hackers stole 700,000 BTC. At the time, the bitcoins were worth $340 million. The exchange’s collapse prompted Japan to be one of the first countries to take regulatory actions against cryptocurrencies.
News of the sale came to light on March 7, which prompted additional cryptocurrency selloffs. One noticeable dynamic of crypto is the fact that the BTC price drives the market. The gains and losses of BTC directly correlate to the gains and losses of altcoins. So, when Kobayashi sold $400 million in BTC holdings, it dragged the price of other coins down as well.
Kobayashi sold his holdings between December and February. Ironically, over half of the BTC that he sold was done so on February 5. That resulted in the price of many cryptocurrencies dropping below 50 percent of their 2018 highs. There is a general correlation between the days when Kobayashi sold his holdings and days when cryptocurrencies were down. Meaning, Kobayashi’s selloffs drove the market.
Experts have estimated that Kobayashi still holds over 166,000 BTC, worth roughly $1.7 billion, in addition to nearly $200 million of bitcoin cash. Kobayashi has also said that he plans to sell off more of his BTC and BCC holdings. If and when he decides to do so, Kobayashi could cause widespread losses and a bear market.
Future Market Watch
At the time of publication, the total crypto market cap had a valuation of $326,935,515,630. However, things could be looking back up for investors. Market Watch recently published an article detailing how the end of the recent bloodbath could be near. According to the head of research at Fundstrat Global Advisors, Thomas Lee, the declines from the past few months should be over.
Before the next bull market begins, the market will enter a “purgatory” phase. This phase will be a dull phase without much noticeable trading action, marked by indecisive action from investors. Lee has predicted that this period could last up to 175 days. When it’s over, those who have “HODL-ed,” or “Held on For Dear Life,” will see a bull market and more significant gains.
This is good news for investors who have seen their portfolios collapse since record-highs toward the end of 2017 and the beginning of 2018. For example, since the start of the year, BTC has shed over 40 percent of its value. Only time will tell which way the cryptocurrency market will turn, but signs are pointing in the right direction.
As cryptocurrencies gain popularity, they have become more prominent in the everyday news cycle. There were a few main stories that drove the cryptocurrency news cycle in the past couple months.
Issues with Coinbase
One of the biggest stories toward the end of 2017 and the beginning of this year were the issues that many users had with exchanges. In some ways, problems with exchanges should be expected. Cryptos are still relatively young, and they exploded in 2017. For example, Coinbase, the most significant American exchange, was adding 100,000 new users a day at one point.
In fact, data shows that Coinbase more than doubled its user base in 2017 alone. It would be hard for any company to handle this type of growth, let alone a company who wasn’t expecting it. But, when people are investing their hard-earned money into cryptocurrencies, they should be able to complete transactions without a problem.
This is especially true when dealing with such volatile markets. Cryptocurrencies have been known to have wild price swings as large as 40 percent in a single day. Customers expect to be able to buy dips and sell peaks without problems. Anytime that there are issues with an exchange, customers miss out on potential earnings.
According to ValuePenguin, over the past nine months or so, thousands of investors have submitted complaints to the Consumer Financial Protection Bureau. Between June 2017 and March 2018, the number of complains increased by more than 650 percent. Many of the claims came thanks to Coinbase, who could not handle transaction volumes during times of heavy trading.
The most significant complaints were because of money being unavailable. Others filed charges claiming that Coinbase did not have enough customer service representatives available. Many other users filed grievances that their USD bank accounts had been overdrawn by up to 500 percent, resulting in hefty overdraft fees.
Simply put, Coinbase grew too quickly. They did not have the customer service team in place to support the number of transactions that occurred. It takes time to train customer service agents, and time was not something that Coinbase had. Fortunately, it appears that things have slowed down. The fact that cryptocurrencies have lost momentum in recent months is something Coinbase sees as an opportunity.
On February 27, Coinbase announced a complete overhaul of their operations. They announced that they were adding 500 new customer service agents. The company also announced that they were introducing Tax Reporting Tools, making it easier for Americans to calculate taxes on their cryptocurrency holdings.
As cryptocurrencies gained momentum, so too did the movement for regulation. As multiple countries around the world threatened regulation, cryptos declined. It’s reasonable to assume that regulatory threats drove the bear market and declines, as customers withdrew their holdings before incurring any further loses.
In February, Reuters reported that there was a growing effort by both Republican and Democratic lawmakers to protect American investors from the risks posed by digital currencies. However, which umbrella regulation would fall under was up to debate. As a new, digital asset class, no one is quite sure whether control would belong to
- The Securities and Exchange Commission
- The Commodity Future Trading Commission
- The Treasury Department
- The Federal Reserve
- Individual States
Furthermore, there was much more attention placed on taxes this year, also proving intimidating for investors. Many cryptocurrency investors saw tremendous gains over the past years, and the American government is not letting these investors get away without first getting their share. This too has contributed to a bearish outlook and sell-offs in the market.
A while back, the IRS requested that Coinbase hand over the information of its users. Coinbase initially fought the request, taking it to court. Courts ruled that although Coinbase did not have to submit all of the information the IRS initially requested, they did have to provide the information for 13,000 of their customers. Coinbase has already alerted users that their data was handed over to the IRS.
This sparked fear among many, who were forced to scramble and file amended returns quickly. The requests impacted users who made at least $20,000 between 2013 and 2015. The IRS continued to warn users that they should report all of their cryptocurrency gains and losses when they file their taxes this year.
In addition to domestic regulation, there has also been a lot of discussion about management from a global perspective. At a recent G20 Summit meeting, global leaders debated the need for the regulation of digital assets. Federico Sturzengger, President of the Central Bank, released a statement saying that two viewpoints became clear during the meetings of world leaders.
One camp favored regulation, while another camp did not necessarily support regulation, but did wish to see improvements made. Some wanted to define the legal services that cryptocurrencies provided. Others feared that defining these services and treating virtual currencies as financial assets would increase their legitimacy, something that it appears most world leaders do not wish to see.
Potential good news for investors, however, was that leaders left the meeting without implementing any hardline regulations. They instead said that countries around the world needed to monitor cryptocurrency assets and the risks presented by them more closely. At a time when cryptos are in decline, the fact that leaders left the G20 summit without regulation was good news.