Cryptocurrencies are plummeting – where will it bottom out?

What was lauded in many places as the future of money some twelve months ago now threatens to vanish into irrelevance. We are talking about cryptocurrencies here. While market capitalisation of all existing representations of such currencies amounted to around USD 835bn last January, only just over USD 120bn remains now – a decline of around 85%. Market leader Bitcoin came dangerously close to the USD 3,500 threshold at the start of the week. Going from the historical high of USD 20,000 in December 2017, the cryptocurrency pioneer has thus lost around 80%.

The business model behind the respective cryptocurrency does not appear to be playing any major role in the price collapse. Ripple, the currency for the banks’ payment networks and the segment’s number two, eased by 87% compared with the highs reached at the turn of the year. The Bitcoin offshoot “Bitcoin Cash” slumped by as much as 93%. The Ethereum network cryptocurrency, which acts as a platform for so-called smart contracts and initial coin offerings, for example to finance start-ups, plummeted to a similar extent.

Various reasons are cited for the current development. There is no doubt that Bitcoin’s slide below the USD 6,000 mark had a part to play. This threshold had acted as a floor in recent months for the observed trading range. With the price having sustainably breached the psychologically important USD 6,000 mark on the downside, numerous investors seem to have been discouraged. The conflict among developers of the Bitcoin Cash cryptocurrency, which resulted in a hard fork, also contributed to the general deterioration in sentiment among investors. This is compounded by two structural stress factors: on the one hand, there is no end to the negative headlines about possible manipulation and fraud. On the other, the hoped-for entry of important institutional investors into the market segment failed to materialise.

A similar collapse in the price of “normal goods” would have led to a reduced supply. This is not the case with cryptocurrencies. Rather, the current quantity offered remains constant from the very outset or even continues to grow, albeit at a slower pace than before on the back of a slowdown in activity. Furthermore, Bitcoin & co. has no central body, such as a central bank, that could have a stabilising effect. What makes the situation even more difficult is that the demand side does not necessarily react positively to lower prices – on the contrary! Instead, losses tend to persuade potential cryptocurrency investors to bury hopes of higher prices and to withdraw increasingly from the market segment. This raises the key problem in relation to cryptocurrencies once again: they have no intrinsic value. While gold itself can at least be processed in the industry as a replacement for other metals, above a certain price, or adorn a person’s neck, this is not the case with the zeros and ones of Bitcoin & co. It is therefore simply not feasible to apply a fundamentally justified lower price limit that could represent a floor for the current fall in value.

The supporters of cryptocurrencies can only hope that sentiment will recover soon, thus leading to rising demand. This would not be the first time. Bitcoin experienced price declines on a similar scale already in 2011 and 2014. At that time, the cryptocurrency managed at least to get back on its feet and resurge again a short while later. However, one thing is quite clear too: history does not necessarily have to repeat itself.

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