Cryptocurrency trading is probably one of the hottest topics in the tech, investment, and finance industry in 2018. In 2017, cryptocurrency investors were smiling all the way to banks with Bitcoin delivering more than 1400% in gains and Ethereum booking as much as 12,000% gains. However, in the year-to-date period, cryptocurrencies have given back much of their 2017 gains. The market capitalization of the general cryptocurrency market has declined from $598B in January to $297B to mark a 50% year-to-date decline.
While it is easy to point fingers at the fundamental and technical analysis that explains the weakness in the cryptocurrencies; it is hard to point to the possibility that sinister forces are at play to keep the cryptocurrencies from making the leap into the mainstream market.
Cryptocurrencies are by nature disruptive
Last year, Christine Lagarde, managing director of the International Monetary Fund (IMF) revealed that the organization was paying attention cryptocurrencies and their potential to disrupt the world. In her words, “we are about to see massive disruptions… it may not be wise to dismiss virtual currencies,” because “virtual currencies might just give existing currencies and monetary policy a run for their money”.
The performance of cryptocurrencies went ahead to dwarf the performance of traditional Wall Street assets as seen in the chart below.
The fact that Bitcoin delivered more than 1400% gains in the same period that the S&P 500, NASDAQ, and Russell 2000 only delivered 28%, 19%, and 13% gains respectively caused massive interest in cryptocurrencies from the mainstream market.
Interestingly, the arrival of services such as eToro USA, which provides people interested in trading cryptocurrencies in the United States a shorter learning curve and access to the markets is also making crypto trading more attractive. Using the power social trading, new traders can follow the trading activities of experienced trader, automatically copy such trades in their own portfolios, and make money as the experts make money without spending too much time poring over charts and graphs.
Cryptocurrency hacks continue to exert downward pressure
However, one of the biggest challenges facing the cryptocurrency market is the security of traders and investors’ funds. Funds held as cryptocurrency are not FDIC insured; hence, a successful hack often leads to lost funds without any hope of recompense. Unfortunately, the highly volatile nature of the cryptocurrency market often sees every news of a successful hack followed by an instant selloff as investors dash for the exits.
Over the weekend, news broke that little known cryptocurrency exchange in South Korea, Coinrail suffered a hack. Coinrail’s statement is terse, it didn’t mention Bitcoin as one of the cryptocurrencies that was stolen, but it did reveal that some altcoins such as Pundi X and NPXS were stolen. Coinrail has also refrained from revealing how much was stolen through the hack but Jon Russell of TechCrunch observed that a wallet address linked to the alleged hacker had more than $40M in cryptocurrency.
Following the news of the hack, the price of Bitcoin declined more than 10% to a session low of $6,647.33 to mark its lowest price since April 9. Practically all the coins in the market are down in response to the news of the hack; in fact, some are down with double digit losses as investors start to scurry for the exits.
Do governments have any business regulating cryptocurrencies?
Last week, news broke that U.S. Federal investigators are taking a closer look at the activities of several cryptocurrency exchanges to determine if they were engaged in price fixing/manipulation activities. The U.S. government doesn’t control or regulate the prices of cryptocurrencies – freedom from government control is one of the key selling points of cryptocurrencies. However, the bitcoin futures that CME group launched late last year are still somewhat subject to government oversight. Hence, price manipulations in exchanges that feed CME’s bitcoin futures can’t be overlooked by government agencies.
Of course, the CME doesn’t seem to have any proof of price manipulations yet, but it asked four exchanges to share trading data in January – a request that the exchanges declined. Now, the Commodity Futures Trading Commission has waded into the matter and it is working with the U.S. Justice Department as part of efforts to find out if fraudulent trading is happening on exchanges.