After last year’s meteoric rise, 2018 promised much for bitcoin and cryptocurrency markets. And it delivered.
Bitcoin continued to remain in the news, except for different reasons. Cryptocurrency markets crashed and their scandals multiplied. Crypto companies suffered growing pains. Big names in the financial services industry announced plans for crypto-related products. (They delayed those plans later). The SEC rejected bitcoin ETF proposals even as it provided regulatory clarity for bitcoin and ethereum’s ether.
Here are the three major developments that defined bitcoin and cryptocurrency markets this year.
A Reversal in Bitcoin Price Trajectory
Towards the end of January 2018, when bitcoin price was just beginning its slide, New York Times columnist Paul Krugman wrote a piece about his barber enquiring whether he should put all his money into bitcoin. Krugman’s barber probably will not have any such questions now. Along with cryptocurrency markets, the bitcoin price bubble has deflated this year.
As of this writing, bitcoin price is down by 69 percent from January this year. The cryptocurrency commands 51.8% of the overall cryptocurrency market’s valuation of $133 billion, which itself is a decline of 84% from its peak during the second week of January.
The fall in bitcoin price and cryptocurrency markets is a function of several factors from low market liquidity and the effect of bitcoin whales to a fall in transaction volumes to regulatory uncertainty keeping large investors away. Unlike mainstream markets, where price declines are par for the course, the crash in crypto markets has had a domino effect on its nascent ecosystem.
ConsenSys, an ethereum studio that funds startups and provides services to the ecosystem, was forced to lay off staff. As was Steemit, a blockchain-based social network. In both cases, crashing cryptocurrency prices played an outsized role in the decisions. Bitcoin miners were forced to shut down operations to avoid losses in mining the cryptocurrency.
It is a measure of the fragility of cryptocurrency ecosystem that even high-profile players, with significant amounts of venture funding, could not escape the negative effects of a price crash. Bitmain, the world’s biggest cryptocurrency miner, closed its Israel development center and let go off its staff. Its IPO application at the Hong Kong Stock Exchange is also in a limbo as authorities, spooked by closures at bitcoin miners, are unsure whether crypto businesses will “exist in a year or two.”
Whither Bitcoin ETF?
Bitcoin’s volatility and regulatory uncertainty have ensured that it remains a fringe asset. Mainstream investors and traders shied away from it, instead watching the cryptocurrency’s price gyrations from the sidelines. Coming into 2018, hopes were high that the SEC would approve a bitcoin ETF to enable such investors to profit from bitcoin’s price changes and bring more liquidity into the system.
Those hopes were dashed after the federal agency rejected a string of bitcoin ETF applications this year. Ironically enough, the only pending ETF proposal in the federal agency’s docket is the VanEck application, which proposes an ETF aimed at institutional investors.
But it would be simplistic to blame the SEC for its hesitation in approving a bitcoin fund. In the frothy cryptocurrency markets at the beginning of this year, there was little infrastructure to support a credible fund proposal. Liquidity in cryptocurrency markets was low even as volatility was high. Custody services were mostly absent. There were no checks and balances on the functioning of underlying cryptocurrency exchanges.
An SEC letter, which outlined these concerns, has led to a proliferation of services, such as custody and insurance. Exchanges are making an effort to organize and police themselves. Stablecoins are intended to bring stability into the cryptocurrency ecosystem. With the entry of established organizations in the bitcoin futures game, some say that chances are high that the agency will approve a bitcoin ETF next year.
Evolution of An Ecosystem
In its January letter outlining concerns with the current state of the cryptocurrency ecosystem, the SEC identified custody, insurance, and lack of regulation at the underlying exchanges as some of its main reasons for not approving bitcoin ETFs. At the end of this year, the situation looks demonstrably better for the cryptocurrency ecosystem. A number of major players have announced crypto-related products. NYSE owner Intercontinental Exchange (ICE) is expected to launch a bitcoin futures trading platform next year.
Even though Wall Street is reportedly cooling on its plans for bitcoin, institutional investors are trading in OTC markets for the cryptocurrency. Custody services have multiplied and insurance for cryptocurrency exchanges, while still expensive, is beginning to become prevalent. 2018 was also a year when stablecoins, which are intended to bring stability to crypto markets through trading at parity with a fiat currency or a basket of stocks, became common at cryptocurrency exchanges. The Winklevoss twins, who own Gemini – a cryptocurrency exchange, took the lead in forming a self-regulatory organization (SRO) for cryptocurrencies.