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Cryptocurrency: is it dead or alive?

But 2018 brought an unpleasant surprise: the market suddenly began to break down. In the first quarter, many people hoped that this was only a “correction,” but the collapse continued. If early in 2018, Bitcoin (BTC) carried a record price of $20,000, then by September it had fallen in price to $6,300, that is, threefold. And the “heroic” ethereum (ETH), which almost surpassed BTC in terms of capitalization in Summer 2017, had fallen fivefold: from $1,300 to $250.

рост и упадок криптовалют

In autumn, the market froze. It seemed that the bottom was reached and the restoration would begin soon. However, November brought another surprise: the rates dropped again. For example, BTC fell in price from $6,000 to $ 4,000. This happened so suddenly that it looked like an evident conspiracy of the major players, so-called “whales”. Autumn investors, following the earlier ones, suffered losses. Many of them completely become disillusioned with the crypto-market, having decided that it is entirely in the grasp to manipulators: such a “market” resembles MMM where quotes are randomly set by puppeteers.

In Winter, the market froze again, while in Spring a long-promised growth began. In March it continued to ascend carefully, and in April it continued to ascend unexpectedly sharply and symmetrically to the drop in November. In both cases, the BTC rate changed by $800 just for an hour, but in November it was a drop, while in April it was a rise. In both cases, there was no kickback: on the contrary, the movement went on. Optimists rushed to buy cryptocurrencies, but the most population smelt a rat. If not only drops but also rises occur “in a snap”, is this not the best proof of pulling the strings?

аналитика криптовалют

So do we believe in true market recovery now? Perhaps this is another trick? Is it worth investing in cryptocurrencies or is it better to forget them like a nightmare? Is the market entirely in the hands of puppeteers or does it have objective laws? We will try to understand this in more detail.

How did it get started: bitcoin and its bubble 2013

The first world’s cryptocurrency was Bitcoin (BTC). It appeared in 2009 and firstly it was known only to specialists in cryptography, as well as to particularly advanced free market activists. But soon it attracted the close attention of investors demonstrating in 2010-2013 a tremendous growth of 4 orders: from $ 0.1 to $ 1000. In other words, the average exchange rate grew by a factor of 10 per year (!!!)

развитие биткоина

In 2013, this BTC’s success gained worldwide fame. However, as often happens, the shock popularization was no in favor of the asset rate: reaching a record mark of $1,200 in December 2013, BTC began to fall in price. Towards the end of 2014, its rate rolled back to $250, following which it remained relatively stable in 2015. A significant part of the growth in 2013 turned out to be a bubble. However, after blowing off the bubble, the BTC rate still remained significantly higher than it was early in 2013 (especially, in all previous years).

рост и упадок биткойнов

How it continued: altcoins and general market bubble 2017

The new growth of the BTC rate began in 2016, and became especially explosive in 2017. At the same time, altcoins, new cryptocurrencies, “alternative” BTC – ethereum (ETH), lightcoin (LTC), emercoin (EMC), and many others asserted themselves in a massive way. If until 2016 they stayed in the deep background of the market flagship, then in 2017 their total capitalization for some time exceeded the capitalization of BTC. In Summer 2017 there was a moment when the ETH acting alone nearly advanced the BTC.

график роста и снижения криптовалют

By the end of 2017, BTC had risen in price to $20,000, while the total capitalization of the cryptocurrency market reached a huge amount of $800 bln (higher than capitalization of any global corporation). But this turned out to be yet another bubble: throughout 2018, just as in 2014, the rate of BTC and other currencies was falling). By the end of the year, the market capitalization decreased to $130 billion.

What can be shown by the comparison of two bubbles

Financial bubbles constitute an unpleasant phenomenon, and yet a logical one. By studying their dynamics it is possible to reveal a lot of interesting things about the nature of the new assets. If we look attentively at the figures, it is possible to note: the bubbles of 2013-2014 and 2017-2018 have much in common.
– In both cases, the rate of bitcoin has dropped approximately five-fold. Market capitalization in the second case has dropped approximately 6-fold.
– In both cases, a general decline lasted about a year, followed by a quiet period.
– In both cases, “after bubbles” the rates have been fixed at the levels that are considerably higher than the levels “before bubbles”. For example, at the end of 2014, BTC was much more expensive than at the end of 2012, while in late 2018 it was much more expensive than in late 2016.

динамика криптовалют

This simple comparison shows: the scale of the 2018 cryptocurrency crash is exaggerated. The bubble has developed according to the same scenario, as it happened last time, and seriously frightened only the novices.

Judging by the charts, the cryptocurrency market is more alive than dead. Moreover, it quite well follows the standard laws of financial bubbles’ development, and its multi-year trend is clearly positive. For the credibility one can recall, for example, the chart of the oil prices in the 2000s. As we can see here there is also a bubble and decline, but after that – recovery to the values, which are much higher than before the bubble. That’s what happens when the assets are really valuable (not just a short-lived hype), and this is exactly what we have been observing in case of cryptocurrency market.

график цен на нефть

With a high degree of probability, right now cryptocurrency investments are of particular interest. The upward movement looks quite reasonable, and why it has happened so abruptly, is there some catch behind it, and what are the fundamental reasons that contributed to the upward trend – we will discuss all these questions next time.

Political and Economic Trends in Favor of the Cryptocurrency Market Development

In the first part of the story we showed that the cryptocurrency market crash in 2018 and the beginning of its recovery in 2019 fit well into the general patterns of the financial bubbles’ development, and also repeat pretty well the Bitcoin dynamics of 2014-2016. But besides the analogies with other bubbles, there are a lot of other arguments in favor of the global growth of the market, among which are the political and economic trends of the recent years.

Relaxation of the Political Climate around the Cryptoassets

The entire year of 2017 has witnessed heated discussions as to the legal status of the digital assets. One of the central events of the year was their legalization in Japan in April. Precisely this legalization, according to many, spurred a dramatic growth of the cryptocurrency market in May (especially, altcoins). But the majority of other countries during this period held more skeptical positions.

The U.S. government on several occasions refused to register bitcoin-ETF – exchange-traded funds, the price of shares in which would repeat the price of BTC. The U.S. government also extremely tightened the conditions of the ICO procedure, while some countries, such as China and South Korea – have banned it completely. Certain countries, such as Indonesia and Salvador, have banned cryptocurrencies to the extent of criminal responsibility.

A number of countries, including Russia, have adopted a cautious wait-and-see attitude, regularly promising to impose restrictions of varying severity, but not hurrying to sign it into law.

A turning point on the way to the global recognition of the cryptocurrency was the beginning of trading the Bitcoin futures at the Chicago exchanges (CME) (the world’s largest stock exchange in terms of turnover) and CBOE in December of 2017. That is when the American government admitted openly that cryptocurrencies are now to be reckoned with. With the beginning of this trade, the powerful financial circles of the USA, whose opinion cannot be ignored by the political leadership, became interested in the development of the cryptocurrency market.

Чикагская торговая палата

In 2018, the following paradox became obvious: even if over the longer term cryptocurrencies are dangerous for the modern political system (tied up in the central banks and the currency exchange regulation), the countries that will be the first to prohibit them will be most affected along with those countries that will simply overdo stirring up negative attitude. Those countries that will settle on legalization will benefit. The drain of brains and capitals will be directed to these countries from the more repressive or unpredictable countries. A typical example of that – Crypto Project GRAM of the Russian businessman Pavel Durov, whose ICO in 2018 reached a record amount, but it was carried out in USA, and not in the legislatively uncertain Russian Federation.

The experience of the countries that have legalized the cryptocurrencies, proved successful both from the financial standpoint, and from the perspective of the international prestige. They proved themselves to be open to the progress and new freedoms. In addition to Japan, Switzerland is especially noteworthy here, because it legalized cryptocurrencies as early as in 2016, but the most brilliantly announced about itself in 2018, when its banks began to introduce cryptocurrency services one after another. Among the innovator banks there was even a Swiss subsidiary of the Russian Savings Bank (Sberbank). The very expression “Swiss bank” became a synonym of not only high reliability, but also innovation.

A milestone event of 2018 was legalization of cryptocurrencies in Germany – the leading economy of the European Union. Rather liberal measures relative to the cryptocurrencies are being applied today in Czechia, Sweden, Canada, Denmark, Australia, Estonia, Norway, Finland, and a number of other countries.

“Legalization parade” has shown: the politicians with repressive attitudes cannot count on the global ban of the cryptocurrencies (which seemed theoretically possible in 2016-2017). Economically developed countries made an obvious choice: “if you cannot stop the process – become its leader”. And precisely in these countries the maximum capitals are being circulated, and the market situation depends precisely on their business activity.

Explosive Growth of the Retail Use of Cryptocurrencies

Despite obvious popularization of cryptocurrencies, there is still a myth that they are purely investment and speculative instrument, which, even if used as a payment method – only in the dark net, and as a
means of payment for illegal commodities. But this is not the case today. As far back as 2013-2015, legal services accepting bitcoin emerged, and in 2016-2018 their market has undergone explosive growth.

The pioneers of the cryptocurrency market of goods and services in 2013, were, for example, Virgin Galactic – space tourism company, Victoria’s Secret lingerie company, Shopify – a supplier of software for the online stores. In 2014, the cryptocurrency was adopted by the Overstock online store, Expedia tourism service, Zynga – operator of the online games, the software monster Microsoft and many others. Some of these companies considerably went up due to the innovations: for example, the shares of Shopify and Overstock have increased in price several-fold since then.

As of today, the cryptocurrency is accepted by hundreds of large companies and thousands of small ones, while the range of their products is approaching the one in a traditional economy. The most popular categories of the goods for the cryptocurrency in the large famous companies are tourism and air tickets (Expedia), software and games (Microsoft, Shopify, Zynga, Steam), clothing and other consumer goods (Victoria’s Secret, Overstock.com, Rakuten), as well as food products (Subway, KFC, Burger King – in Russia). As an example, Playboy erotic products, premium accounts of the 4chan.org and reddit.com forums, Bloomberg.com business news, automobiles in the Czech show room Alza and many other goods can be also purchased for cryptocurrency.

A number of well-known companies, although they prefer traditional payments, nevertheless allow crypto payments through the intermediary services, such as gyft.com (trading with the card Gyft for BTC). For example, Ebay online store, Wallmart supermarket chain, Starbucks restaurants, Uber taxi service, etc. The turnover of gyft.com is evaluated in the amount of 25 million dollars with only 38 employees.

Small start-up companies often use ready-made multicurrency gateways such as coinpayments.net. It supports dozens of currencies, and hosts about 400 companies. In addition to mainstream, it contains a lot of specialized commodities. For example, crypto-armory.com sells cartridges, francvila.com – Swiss watches, directvoltage.com – 3D-printers, electric motors, CNC machines, etc. Some new stores not only accept cryptocurrencies, but also purposely give up fiat currency. For example, crypto-armory.com, explaining their refusal from fiat currency, state both ideological, and narrow pragmatic reasons. In the opinion of the owners of the store, it is easier to accept cryptocurrency payments both technically and legally.

заработок на криптовалюте

An important trend of 2017-2018, in addition to the general growth of the commodity market – re-orientation of the stores to the multi-currency payments. Whereas previously most of them accepted only BTC, now a sign of good manners is to accept also LTC, ETH, XMR and at least several more currencies.

Thus, while the politicians were solving the problem in the manner “not possible to allow – disallow”, a vast market of commodities for cryptocurrency spontaneously emerged on the Internet. Some of its participants have multibillion capitalizations. This market is very international. The majority of commodities and services can be bought even from Russia and other countries, where cryptocurrency is not legal as an internal payment instrument, but is not prohibited as such. Today, it is hard to imagine a consumer good, which cannot be bought for cryptocurrency.

The Latest Trend – Support of Cryptocurrencies by Smartphones

The first smartphone with a cryptocurrency wallet was HYPERLINK “https://bitcryptonews.ru/blogs/sravnenie-blokchejn-smartfonov-exodus-1-i-finney”HTC Exodus 1, released in the autumn of 2018. Then, a crypto smartphone HYPERLINK emerged “https://bitcryptonews.ru/blogs/obzor-kriptosmartfona-finney”Finney. And in March of 2019, the baton was unexpectedly picked up by the smartphone from the major South Korean company, Samsung – Galaxy S10. And although Samsung refrained from the direct embedding of the cryptocurrency wallet into the standard supply set, a brand wallet of Samsung can be installed from the Galaxy Store

On the part of crypto enthusiasts, there are a number of claims to Samsung initiative, among which – the lack of bitcoin support (BTC). At the moment, Samsung Blockchain Wallet supports only Ethereum (ETH) and ERC-20 standard currencies and tokens created on its basis:
Basic Attention Token (BAT), Chainlink (LINK), BinanceCoin (BNB), True USD (TUSD), USD Coin (USDC), Paxos Standard (PAX) and others

платформы смартфонов криптовалют

Anyway, from a political and PR perspective, the emergence of Galaxy S10 is a great event.
First of all, smartphone can attract to the cryptocurrency market new people who have greater confidence in the famous brand, than in the traditional bulky cryptocurrency wallets. Now, many people are frightened away from the cryptocurrencies only by technical difficulties, whereas smartphones on many occasions have proved their ability to promote to the masses those things, which previously seemed to be very complex.

Secondly, this step of Samsung is a clear signal both to the domestic and foreign governments: big business is on the side of the new technologies. South Korea has a reputation of a country not very friendly to cryptocurrencies, however, its business giant publicly demonstrated another attitude.

Thirdly, the initiative of Samsung with a high degree of probability will be emulated by other leading producers of communication devices. Thus, shortly after the release of Galaxy S10, there appeared a news that a cryptocurrency wallet will soon be available in iOS Opera Touch, which means that cryptocurrencies can be also stored in iPhone of Apple.

All this creates excellent prerequisites both for the world legalization of the cryptocurrencies, and for the growth of the market due to the increase of the number of users.

Thus, despite the “roller coaster” of the cryptocurrency exchange rates, some fundamental processes have developed steadily in the same direction in the recent years: expansion of the commodity market for cryptocurrency, increase in the number of countries with a liberal attitude to cryptocurrencies, adoption of cryptocurrencies as a strategic technology by more and more industrial giants. The total number of individuals who tried to work with the cryptocurrencies grows steadily, while the new technological trends (in particular, crypto smartphones), can additionally accelerate this growth.

The only thing that can seriously damage a cryptocurrency market is its global ban, but it seems to be unlikely. Right now there are about 40 million bitcoin wallets on earth. It is believed that on average their number is doubled annually, which means that within 5 years it can reach a billion. And if now a global ban on cryptocurrencies is unrealistic due to their profitability for the developed countries, by that time their prohibition will become impossible almost physically.

In the first part of the story we had put forward the arguments as to why the investors need not fear the bubble of 2017-2018: in the end, the bubble showed not so much the riskiness of the crypto investments, but rather their long-term prospects. Today we described political and economic events, which have occurred in parallel “behind the scenes”, and in which there were no “drops” – only progressive development toward the construction of the crypto economy. And in the next, third part, we will try to describe in detail specific financial reasons of the collapse and recovery of the market in 2018-2019.

Causes of the financial crisis and the market recovery

The market of cryptocurrencies is not only alive but it also soars rapidly as we have proven before using political and economical arguments. In this part of the text we are going to take a close look at those factors that have influenced the financial crisis of the 2018 and the market recovery in early 2019.

Winter-spring: Chicago futures and the market congestion

The growth of the cryptocurrencies market in the end of 2017 was mostly stimulated by the the beginning of bitcoin-futures bidding on CME and CBOE. The stir was generally caused by ideological background. As we have said before the fact that the bidding had started represented the acception of the cryptocurrencies market from the American finacial establishement and even by the government which hadn’t allowed the cryptocurrencies to be introduced in the tradicional exchange before. In the december 2017 the SEC leadership had to announce that bitcoin was something to be reckoned with

But it was exactly the bidding start in the middle of december that had triggered the market decline. And this time the background was purely economical: there was an inequality between BTC traders and their customers. The BTC supply was stable and massive due to the mining companies abundance. Miner was obliged to cash some of his cryptocurrencies for both profit consolidation and electricity bills as well as other business expences. As for the BTC demand, it wasn’t quite optimistic in the december 2017. There was an understanding between qualified Chicago financiers that bitcoin was overvalued and it was dangerous to buy it at the current exchange rate. It was much easier to force miners to lower the price because otherwise they would have nowhere else to go.

капитализация криптовалют

Many analysts consider this factor to lead to the BTC, and subsequently other cruptocurrencies, exchange rate reduction. And when the price lowering started, miners bedan negotiating under-pricing contracts to avoid a complete business collapse. It contributed to top-down trend for a few month.
Bitcion-futures weren’t of course the single recession factor. As it was in 2013 – the market got overburdened. The bubble was certain to burst. Futures played the role of a trigger and also largely determined the speed of recession – the speed of miners making new concessions.

Summer-autumn: supply redunction and new investor interest

Although the BTC and other cryptocurrencies supply had been sustainable during winter-spring period it became clear in summer that mining would soon get unfavourable. In countries where electricity prices had been relatively high the most profitable currencies from whattomine.org list began moving to recoupment limit. It was harder each time to continue making concessions. Some of the companies decided to suspend activities instead of working at a sacrifice.

Many of individual investors stopped selling currencies that had went down in value. Their logic was quite simple. Imagine you had bought a BTC for $15-20 thousand and the price fell to the level of $6-7 thousand. And you have a choice: to sell it for cheap admitting financial loses or to wait for the market recovery. Most of the investors chose the second variant.
As the result the supply has decreased and the fall slowd down. In September the BTC exchange rate became stable in the area of $6500. The demand started to raise from three types of independant investors at once.

– Those investors who was familiar to the cryptocurrencies market and those had decided that the lower point of the fall was close(especially, in September)

– New investors – citizens of countries with troubled economics and high level of inflation such as Turkey, Venezuela and Argentina. The fear of invlation in crisis situations before made citizens of many countries buy dollars and euros. This time investments in cryptocurrencies seemed to them more prospective. The interest turned out to be massive. For example, an August survey showed that the number of cryptocurrencies holders in Turkey is twice as high as in Europe: 18% compared to 9%.

– Huge institutional investors from the USA and the main global economies – pension funds and other big players who had been avoiding crypto asserts owning to volatility and undetermined legislative status. Gradually they realised the promise. Politic climat allevation about which we have said before was also an important factor.

проблемы криптовалют

The first and the second group had shown an immediate activity while the third had taken a wait-and-see attitude with the clear intention to invest significant amounts of money it the future. The grown investor interest was keeping the exchange rate sustainable for the whole autumn. The BTC exchange rate had represented stability that was even higher than US stock market stability. For some time it became a defencive asset like gold(a role pledged by the analytics much time before).

November-april: reaching the bottom and starting to recover

New crisis started on 14 of November – dramatically and unexpectedly. It took an hour for the BTC exchange rate to drop in $800. It the following days the market dropped even far. To the end of November BTC and the market in general were down a third: BTC – from 6300$ to $4000, the market capitalization – from $210 to $130 billion.

There are two main versions explaining what had happened that it fact don’t contradict each other.

Fundamental and obvious version. Huge financial comunities that had noticed the prospective of BTC in summer-autumn period decided to buy it for as cheap as it was possible. A question about lowering a price is specific. The fact is that they had such interest. This version doesent explain the sharpness of the fall but it does explain the actual fact of the fall and it’s seriousness.

Complicated and conspirological version. It was cheating scandal at SK exchange that had caused the fall. The exchange was bought by the Singapour company BK Global Consortium. In September-October the companny attempted to make an exchange the front-runner by promotion, supporting high volume of trading ect. In a short time the trading volume had increased more than a fourfold. But in the end of November Crypto Exchange Ranks (CER) accused the company of cheating. It 3 days the value of Korean won in global trading had went to pot. It 3 days more the fall began. This version explains the dramatic speed of the fall but it’s not nesseserely to believe it. There might be another short-term reason of the fall. It is important that many of powers were interested in it.

In the following 4 month the maket wasn’t able to recover from this strike. In December it dropped even more, in January it was “laying on the bottom”, it February it slowly started to recover but only in April it raised for real. Literally in an hour the exchange rate had grown in $800 and again it was followed by a gradual growth. In less than a month the market capitalisation had raised from $140 to $180 billion and this trend presists now.

развитие криптовалют

So what happened in early April and why this growth and the November fall seem to have almost the same scenario? Ironically, they have the similar reason: Those inwestors who wanted the fall to buy BTC later became interested interested in its rise.

In December 2018 many experts had already been talking about the cryptocurrency owersold and unparalleled deficit of traders. While in November investors were ready to give into fear to minimise their losses? In December their businesses were too damaged to worsen it. The “hodl”(from “hold”) tactic turned out to be the single reasonable solution. Further rates reduction was rather unlikely(even if someone had an interest in it). Investors steadily realized that the time for purchase had come. Thus in February the rates had increased. It became clear by the end of March that new fall is almost nobody’s interest. Everyone wants to bay and waits for a rise. And just a small trigger is enough in case with such sentiment.

Who was to pull this trigger is not that important. Probably it was someone from the big players, maybe it was a large exchange again. Anyway, many people were looking forward to it.

Conclusion

Telling you the truth the cycle was planned in March when the rise had just started and it wasn’t clear if cryptocurrensy was dead or alive. Here comes the title of the article. But today there is no doughts the lift of the trading volume and assets value is visible. Nevertheless we gave you some extra information that can’t be get from those charts.

Cryptocurrencies are becoming a vital part of the economy. They were mainly a speculative asset in the past but today it’s more of a currency. They were mainly for market enthusiasts in the past but today many countries has accepted them. Many people considered them as a short-term hype feature but today it’s obvious that digital assets have a sirious basis and rapidly gain popylarity in spite of any difficulties.

The question about cryptocurrency market is solved.What exaclty will it look like? Which currencies are going to prevail? Which are going to burst and how many of them will remain? How is going to change the global economy and policy? Many of the answers we will know in the next few years.
In the next publication we will try to analise what $5200 will become if we invest it in BTC now. We will show you that even without any rollercoaster it may turn into $300000 in 5 years.

Существует схема, согласно которой число клиентов BTC удваивается каждый год. Это было похоже, например, с пользователями Facebook. Согласно закону Меткалфа, капитализация проекта растет пропорционально количеству клиентов. В нашем случае это означает автоматический рост обменных курсов. Конечно, криптовалюты более волатильны, чем другие оценки, и они не точно соответствуют показателю степени. Тем не менее, мы попытаемся измерить, что будет 1 доллар, вложенный в BTC через пять лет.

Давайте предположим, что 5000 долларов – это справедливая цена сегодня.

Виктор Аргонов, к.т.н. по физике и математике.