The cryptocurrency market has truly been something for investors and spectators to marvel at. While a large year in traditional shares could imply a gain in value of around 10% (shares historically average 7% per annum, including reinvestment of dividends), the total market limit of all cryptocurrencies increased by more than 3,300% last year. Of course, this included the introduction of new currencies, but it was also a function of more than a dozen virtual currencies that increased more than 10,000% in 2017.
During a tranche of approximately 53 weeks between December 31, 2016 and On January 7, 2018, cryptocurrency valuations were catapulted from $ 17.7 billion to a maximum of $ 835 billion, which represents an increase in the value of more than 4,500%. In comparison, the decades of the S & P 500 have been taken several decades to obtain similar returns.
Putting the correction of the cryptocurrency in perspective
However, the big gains also usually come with big corrections. Between the peak of the cryptocurrency markets on January 7 and its minimum on January 17 ($ 414.9 billion), approximately $ 420 billion in stock market capitalization was lost. In effect, half of the encrypted market limit was erased in a period of 10 days.
Let's put this in an even greater perspective. Here were the high and low watermarks for four of the most popular virtual currencies between January 7 and January 17, according to CoinMarketCap.com, along with the maximum percentage lost in parentheses peak:
- Bitcoin : $ 17,579.60 / $ 9,402.29 (46.5%)
- Ethereum: $ 1,432.88 / $ 780.92 (45.5%)
- Ripple: $ 3.49 / $ 0.8978 (74.3%)
- Litecoin: $ 305.53 / $ 141.01 (53.8%)
On a percentage basis, these movements are huge. Bitcoin, the most popular cryptocurrency in the world, was about to lose half of its value, as was the second largest cryptocurrency by market capitalization, Ethereum. Ripple, which has benefited from two key blockchain partnerships with global banking institutions, virtually lost three quarters of its value from end to end. Litecoin did the same with almost a 54% loss.
But the magnitude of these falls is even more revealing when we consider what type of capitalization was lost:
- Bitcoin: $ 137.5 billion
- Ethereum: $ 63.3 billion
- Ripple : $ 100.4 billion
- Litecoin: $ 9 billion
Meanwhile, Ripple's $ 100.4 billion fall is higher than the market capitalization of financial investment firm Morgan Stanley . And Ethereum erasing $ 63.3 billion is similar to General Market & # 39; market capitalization that disappears completely in 10 days.
Is this correction justified? Probably.
The big questions, of course, are why the correction occurred in the first place and if it was justified.
Although there are no certainties with virtual currencies, the lowest movement seems to be linked to four catalysts. This includes South Korea in a potential domestic cryptocurrency exchange offensive, China becomes stricter with virtual currency trading, stop-loss orders trigger and create a downward cascade, and retail investors use their emotions in its sleeves.
Regarding the second question, although it could be a minority, my opinion is that this correction was definitely justified.
If we look at the main catalysts for bitcoin, Ethereum, Ripple and Litecoin, it has been the evolution of blockchain technology Blockchain is the digital and decentralized ledger tied to virtual currencies that registers all transactions.
The possibilities with blockchain seem endless, at least for the moment. Its use is particularly attractive to financial services companies that currently deal with settlement times of up to three to five days in cross-border transactions. Blockchain solves this by pushing clearance and validation times to only a few seconds in some cases, while also potentially reducing transaction fees by eliminating the broker (banks usually act as third parties in transactions).
However, blockchain technology is not a block to be accepted with open arms by companies. This is a technology that bitcoin brought to light almost a decade ago, and it has taken so long to be tested in small-scale projects. In addition, there is no guarantee that the blockchain technology is remotely compatible with the current payment networks, which could require a costly and costly revision of the infrastructure in the event that the financial services companies jump on board.
If history has shown anything, it is that investors are notorious for overestimating how quickly new technologies will be adopted. This does not mean that blockchain technology can not be the element of change that everyone expects so much to suggest that it will probably take more time to become a conventional solution for large companies. If that is really the case, then this recent correction in cryptocurrencies could be well justified.