- Here’s why the crash is a major positive for the future of crypto assets.
As the time of writing of this email, Bitcoin, the bellwether of crypto asset class, is trading at $8,658, down 56% from its all time high of approximately $20,000. On an aggregate basis, the decline for the entire category was severe as the total market cap went from $814 billion on Jan 8th to $277 billion on Feb 6th, a 66% drop from peak to trough.
Whilst the extent of the decline may have been shocking to some, the more experienced investors recognized the odds of such outcome where high. In a short article I published last November 28th, “Bitcoin’s technicals are signaling a major correction ahead” I argued that, in light of both market’s psychology and Bitcoin’s historical price action, a major retracement was to be expected. Furthermore, the support level just below $6,000 referenced in the article also played out as the low for this correction was printed at $5,918.
While such price action has been harrowing for most investors, the “crash” was a needed development that sets up the stage for a more mature phase for this novel asset class. 2017 saw a the hypertrophic growth of the category not just in terms of prices, but also in terms of the number of participants and new assets being launched. Such chaotic rise has generated a great deal of “irrational exuberance”, not to mention outright fraud.
The slump is therefore a positive on three major counts:
- A significant share of the more recent adopters, went into Bitcoin and crypto without much understanding of the investment case and the risk involved, purely driven by greed and the prospect of easy gains. A lot of these late comers has witnessed the value of their investment cut in half and are probably underwater. As often is the case, the correction weeds out speculators and “educates” those who are left about the volatility of the asset class. Those who are left “hodling” are going to be, by definition, more long-term minded and cognizant of the pros, and cons, of investing into this very exciting but volatile asset class. Lastly the sell-off has also facilitated a rotation from less experienced into more sophisticated and strategically minded investors.
- Lastly a period of consolidation is necessary so to refocus the entire community onto the fundamentals that drive the adoption of crypto assets rather than the speculative allure of seemingly ever rising prices. For Bitcoin for example it will be interesting to monitor how the increased adoption of Segwit and, later in the year, of Lightning Network, will affect transaction speed and fees, two crucial elements to expand the usability of Bitcoin beyond the simple “store of value”. For Ethereum, the challenge is the implementation of Casper and Plasma, the protocol improvements aimed to migrate from Proof of Work to Proof of Stake and massively increase the network’s capacity. A critical challenge if Ethereum is to deliver its promise of becoming a global computing platform and stave off the competition of other blockchains such as NEO and EOS.
As many investors have been anguished by the price action over the last several weeks, it can be argued the sell off is the classic “pause that refreshes” and sets up the stage for a more mature phase in cryptoland.
- Date of publication:
- Tue, 02/13/2018 - 19:44
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