Title: Cryptocurrencies: too early for the swan song

It can go that fast – this thought must be inevitable if one looks back at the performance of the important cryptocurrencies in recent weeks. Bitcoin, Ripple and Litecoin, three of the most important representatives of their guild, have lost around 50% of their value since the start of the year. In fact, Ripple has fallen by nearly 75% from its high at the start of January. The market capitalisation of the approx. 1,500 cryptocurrencies currently available fell significantly in January, with the total value falling from more than USD 800bn a few weeks ago to below USD 400bn at present. In light of such figures, it comes as no surprise that many observers are identifying a financial bubble that has burst and already predicting the end of the cryptocurrencies.

The list of reasons responsible for the shift in sentiment we are currently seeing is long and goes well beyond the simple observation of “preceding exaggeration”. The regulatory authorities are increasingly shifting their attention to cryptocurrencies. This was particularly the case in Asia, where the use of Bitcoin & Co is much more widespread than here. The Chinese government is cracking down on Bitcoin miners. According to media reports, the Chinese state is also blocking online access to trading platforms for cryptocurrencies. The Indian government also announced that measures would be taken to prevent the use of cryptocurrencies as a means of payment.

Besides the quite structural burden of strict regulation, other events are happening that compromise the reputation of cryptocurrencies. The Japanese trading platform Coincheck recently fell victim to hackers, who stole more than USD 500m. The Japanese financial supervisory authority has meanwhile raided the company’s offices. The US financial supervisory bodies are also investigating discrepancies in the US. This concerns the important trading platform Bitfinex, which is suspected of having manipulated prices.

Independent of state measures, reports coming from the private sector are unlikely to be very edifying from the cryptocurrency supporters’ perspective. On the one hand, utilities in Europe and Canada have clearly stated that they are not prepared to provide energy on a large scale for the so-called mining. On the other, Facebook stated that advertisements relating to cryptocurrencies will be blocked until further notice.

A considerable part of the latest cryptocurrency tail spin could also be attributable to two very traditional factors for the general development on the financial markets. The appetite for risk among financial market players has eased significantly since the start of the year, which is suggested by the performance of the DZ BANK volatility index, among other things. In view of their volatility in particular, Bitcoin & Co. are likely to become less attractive for potential investors in such an environment. The attraction of the cryptocurrencies does not benefit either from nascent speculation that important central banks, especially the Federal Reserve and the European Central Bank, could scale back their expansionary policy quicker than assumed only a few weeks ago. The prospect – or at least the potential –of a less abundant provision of liquidity and higher key interest rates is likely to deter traditional financial players in particular from investing in cryptocurrencies.

Numerous observers, who just like DZ BANK Research had warned at the end of 2017 about the risks associated with cryptocurrencies, are likely to feel vindicated these days. However, this should not belie the fact that Bitcoin & Co. continue to enjoy certain advantages over the traditional financial system, especially the option of conducting cross-border transactions quickly, easily and comparatively securely. Furthermore, the underlying blockchain technology is becoming more and more established. The EU Commission announced yesterday that it has set up an observatory for this area, to sound out the “risks and the potential”. Against this background, it is undoubtedly much too early to herald the swan song of the cryptocurrencies.

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