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Dec 31, 2018, 16:26
The Volatility of Cryptocurrencies
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Cryptocurrencies have made headlines in recent months due to the rise in popularity. As more people adopt this new way of transferring value, markets of all types are being disrupted. The adoption of blockchain technology is changing how people transact in their day to day life.

 

Over the last month, the cryptocurrency market has lost $41 billion of its valuation. Bitcoin dropped from $6,400 to $5,170. Bitcoin maintained a high level of stability from August to November in the $6,300 to $6,800 range. It plunged by more than 19% in the month of November. Following bitcoin, other major cryptocurrencies like Ethereum, Bitcoin Cash, Litecoin, and Ripple showed losses in the range of 10% to 30% against the US dollar. After an epic rally last year that exceeded many of history’s most notorious bubbles, cryptocurrencies have become mired in a nearly $700 billion rout that shows few signs of abating.

 

Cryptocurrency market had been on a bearish trend achieving an all-time high valuation at over $800 billion in December 2017. The price of Bitcoin in 2017 had grown to a maximum of 2700% and some other cryptocurrency had achieved a higher growth. Bitcoin had set a record high on December 2017 of 19,891 on the Bitfinex exchange.  But boom and bust cycles are nothing new for the cryptocurrency market. Cryptocurrency rates are very unstable and could experience a change of over 10% in a day.   On 6 January 2018, Bitcoin price reached its peak and plunged about 46%. From 6 January to 6 February 2018, bitcoin fell by more than 65%. The other cryptocurrencies also peaked from December 2017 through January 2018 and then took a plunge. In the first quarter of 2018, the cryptocurrencies’ market capitalization lost at least 342 billion US dollars. The huge surge in value in December was because of the introduction of CME and CBOE, Bitcoin futures allowing people to take short and long positions on the value of Bitcoin.

 

The collapse might be because of the SEC’s announcement that the operators of two Initial Coin Offerings (ICOs) broke the law by selling unlicensed securities. This news was enough to spook some investors. The collapse might also have been because of the bad news from chip makers Nvidia and Advanced Micro Devices. These companies reported a steep sales decline for cryptocurrency equipment. The decline suggested that the interest in crypto has waned.

 

2018 should have been an ideal year for digital currencies to prove their worth as alternatives to traditional currency. Government-backed currencies were pulled down by the Brexit concerns. Yet bitcoin and the other cryptocurrencies failed to stage a comeback. Japan's Financial Service Agency issued business improvement orders to 6 exchanges after conducting on-site inspections. The national regulator declared that the exchanges needed to improve their KYC regulations and work to reduce risk. Bitflyer, a major exchange, announced that they will not accept new customers pending review of their operational practices. Bitflyer will also review the existing users as part of their anti-money laundering measures.

 

Wall Street has been very hesitant to accept cryptocurrency. Cryptocurrency called the mother of all bubbles even bigger than the dot-com bubble. The dot-com bubble was a historic economic bubble that occurred from 1995 to 2000 because of extreme growth in the usage of the internet. The burst of the bubble lasted from 2000 to 2002. Because of the crash, many online shopping companies failed and shut down.

 

Altcoins market cap declined by 85% since peaking above $550 billion in January and now it is valued at $78.4 billion. Thirteen of the fifteen most valuable cryptocurrencies have declined at least 78% from their all-time highs. XRP has declined 93%, Bitcoin cash has declined 90%, Cardano has declined 95%, IOTA has declined 91%, Tron has declined 94% and NEO has declined 92%.

 

India has been one of the countries that have contributed to technological advancements, either as a developer or as a market. Technological innovations, including virtual currencies, have the potential to improve the efficiency of the financial system. One such advancement is the use of the distributed ledger technology for trading in cryptocurrencies. But the cryptocurrency industry failed to take off in India. The Reserve Bank of India (RBI) cautioned the users, holders, and traders of virtual currencies regarding the risk associated in dealing with such virtual currencies. Crypto assets raise concerns about consumer protection, integrity, and money laundering. Cryptocurrency regulations have been a problem because of its decentralized nature.

 

After months of deliberation, on October 30, the Financial Stability and Development Council (FSDC) discussed the framework to legally ban the usage of private cryptocurrencies like Bitcoin. Instead of taking this extreme step, the FSDC should study and propose a legal framework which will allow the safe use of cryptocurrencies.

 

When the dot-com bubble burst, the implosion saw a $1.7 trillion wiped from their market value. Despite the similar pattern, it is erroneous to draw a direct comparison between the dot-com bubble and the cryptocurrency crash. There are similarities in terms of overvalued new technology start-ups with unsustainable business models between the two businesses, the sheer scale of crypto and dot-com businesses are not comparable. The bankers and financiers jumping onto the crypto train is a signal that the bubble is yet to come. So the 2018 cryptocurrency crash is just a blip and not a bubble bursting.

 

 

This graph presents the evolution of Bitcoin, Ethereum, Bitcoin Cash price index from January 2018 to November 2018. This price index is an average of the cryptocurrency prices across leading global exchanges.

 

RBI Governors over the years (1935-1962)

 

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