Is the Crypto Rebound for Real?

Crypto product valuations are rising as they technology is making progress

Crypto prices are making a comeback but fundamentals are changing too. (Shutterstock)

After more than a year dwelling in the cellar of price collapse and humiliation, Bitcoin is leading a resurgence in the cryptocurrency world. From April 1 through April 8 of this year, the world’s first cryptocurrency’s price increased by 20 percent. Other major cryptocurrencies such as Ethereum, Litecoin, and Ripple have also seen their values rise rapidly and quite high, before giving back a little of their gain. More experts predict that “cryptos” are now here to stay.

Of course, not every cryptocurrency has benefitted from the rebound, but it does beg the question, is this latest cryptocurrency rally for real?

Why now?

Looking back over the past decade, the big idea of cryptocurrencies was that safe, anonymous transactions could be made by anyone anywhere in the world, in currencies that weren’t controlled, manipulated or devalued by corrupt central banks. That was the whole premise of Bitcoin, which was created in 2008 in the midst of the global financial meltdown. Over the next few years, speculators and investors warmed to the idea of Bitcoin and many more nascent cryptocurrencies. Bitcoin and others saw their prices rise and fall repeatedly.

Then, in 2017, everything changed. The cryptocurrency market exploded, with initial coin offerings (ICOs), exploding and prices of coins such as Bitcoin, Ethereum and Ripple skyrocketing by factors of hundreds and even thousands in some cases. By late 2017, Bitcoin’s value had risen from around $1337 up to $19,400 and the number of cryptocurrencies had exceeded 3,000. Then, the crash of 2018 happened, and investors saw Bitcoin values drop by about 80% over the course of the year.

But in the past few weeks, we’ve seen a massive reversal. Why now? What’s changed?

Actually, quite a lot.

Overhyped, Overbought, and Oversold

Before we talk about the advances that cryptocurrencies have made in the past 18 months, it’s helpful to state that the last crash was a result of the potential of cryptocurrencies being tremendously overhyped. The promise of this powerful new form of currency and technology captured the world’s imagination. The results were predictable and devastating.

Similar to the several months preceding the stock market crashes of 1929 and 2000, people were throwing ridiculous amounts of money at crypto assets – and pseudo crypto assets - that they really didn’t understand. But few considered the then limited capabilities of the most innovative financial invention to come into the world in the past millennium.

The hype was that cryptocurrencies were going to change the world’s financial systems and allow individuals to earn, buy and sell without any official authority knowing about it. They would also fundamentally change the way banking and currencies were managed and even threatened their very existence. At least that was the promise.

But the crypto buying frenzy pushed prices beyond all expectations and realistic values and the inevitable crash followed suit. Bitcoin, as the first and lead cryptocurrency, benefitted the most during the irrational exuberance of 2017, but also suffered heavily when the crash finally came.

More than Currencies

But it’s also important to note that many cryptos have nothing to do with actual currencies, digital or otherwise. Some of them enable sharing functions that required openness and trust, such allowing private individual to sell excess computing capacity on their personal computers, enabling the sharing of artificial intelligence, and many other unique and technology-optimizing features. Those are just two of many examples of a great many applications that blockchain technology – the core of cryptocurrencies – makes possible.

But, like the dotcom mania of 2000, many crypto offerings certainly were frauds, or nearly so, with little to show for their hype and rising valuations. However, just as fake dotcom valuations didn’t mean that the internet was a fraud - only that some frauds took advantage of market conditions - the same can be said about deceptive cryptocurrency offerings. It was a case of a hungry market chasing too few good options, and even the valid technologies had yet to reach their potential.

An Idea Whose Time Has Come?

So even since the bubble burst, cryptocurrency technologies have continued to evolve and develop, gaining more credibility. But problems remain. Scalability is still a challenge. It’s improving, but they’re still not in a position operationally to offer services that would rival a Paypal, for instance.

Another big issue is that mining as a way of keeping integrity of a currency, Bitcoin in particular, has not been the solution for trust that some thought it would be. Mining is too expensive, elitist and subject to manipulation. Volatility also remains a barrier to widespread adoption, as it reflects high uncertainty that the market has with the industry as a whole. And establishing applications beyond the familiar currency uses for the market is still an obstacle as well.

All of these challenges are in the process of being addressed if not resolved. The previous renegade identity of cryptocurrencies, though not completely gone, is in the process of being left behind. Rather than threatening governments and central banks with untraceable and unmanaged currencies, some of the major cryptocurrencies are now starting to working with governments and financial services firms.

Governments, Big Finance, and “Whales” Buy into Cryptos

At the December 2018 G20 Summit in Buenos Aires, for example, leaders signed a joint declaration to help establish international cryptocurrency regulations in harmony with Financial Action Task Force standards. But just as importantly, leading financial institutions such as Fidelity, Intercontinental Exchange (owner of the New York Stock Exchange), Nasdaq and other large Asian based financial firms such as Samsung, SBI Holdings are now exploring the most effective ways to adopt cryptocurrencies.

Even Jamie Dimon, CEO of JPMorgan and inveterate critic of cryptocurrencies has changed his mind. In fact, JPMorgan has launched its own cryptocurrency. 

So the crypto bull run we’re seeing today is due to investors re-entering the market in a big way. So-called “whales” are scooping up Bitcoin, Ethereum, and other major cryptocurrencies by the millions and tens of millions. Their big block purchases of heavily discounted coins are a big factor in the changing investor sentiment that the market is enjoying. Given the maturation of the industry and the growing participation by governments and financial firms, it’s reasonable to conclude that the accumulation trend will continue in the market for the foreseeable future.

 Are Cryptocurrencies “Safe” Yet?

It would be premature to say that cryptocurrencies are a “safe investment” because it isn’t true – yet. Volatility, scalability an adaptability still need to be resolved. So also do international regulations so that cryptos can be integrated into the existing system rather than operating outside of it. To that point, a new framework of regulations will be presented at G20 Finance Ministers and Central Bank Governors meeting in June at Fukuoka in June of 2019.

Still, bad actors operating in the darker areas of the world – terrorists, money launders, drug dealers, etc. – still use cryptocurrencies to make transactions, just like they use fiat cash as well as he banking system. Ideally, this should change.

That said, other, more mainstream and legitimate actors such as the state of Ohio accepting tax payments in Bitcoin, Overstock.com and Tesla accepting Bitcoin and investors such as Tyler and Cameron Winklevoss of Facebook, billionaire Tim Draper, and YouTube’s most popular content creator all choosing cryptocurrencies over conventional ones.

Like the internet in the early 2000s, cryptocurrencies are going through the iterations, technological advancements and legal vetting that are necessary to bring them to the mainstream economy. That’s happening today, and a recent study by the Brookings Institute by Harvard scholar Timothy G. Massad identifies seven key recommendations for adapting cryptocurrencies into the economy. In other words, the establishment now recognizes the legitimacy of cryptocurrencies and the necessity of helping that integration process move forward.

James Gorrie is a writer based in Texas. He is the author of “The China Crisis.”

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.