SAN FRANCISCO – The news on Wall Street this week has been desolate: strong declines, fears of a bear market and high-level technology stocks that have suddenly collapsed.
Traditional equity investors may be beating, but they should be glad they did not put their money in cryptocurrencies. As of Wednesday, the price of a Bitcoin had dropped about 25 percent in a week and was more than 75 percent lower than its peak in December.
Other digital tokens have decreased even more in value.
The last declines occur almost a year after the cryptocurrency markets, fed by an influx of new and rich investors, have gone into overdrive. There are several factors behind the collapse in prices, many of which are the downside that has driven people to cryptocurrency in the first place.
Relying on unregulated infrastructures and exchanges is risky.
Most cryptocurrency exchanges take place outside the United States in the case of exchanges with little or no regulatory oversight. This allowed investors to accumulate with the abandonment, but the inherent the dangers have long been clear.
This year, researchers at the University of Texas have published evidence suggesting that one of the larger exchanges, Bitfinex, helped create a proprietary cryptocurrency, Tether, which was used to artificially inflate the price of Bitcoin and other digital tokens.
Bloomberg reported Tuesday that the Justice Department was conducting a criminal investigation into price manipulation using Tether, one of the many Tether-related issues that are frightening investors. Each unit of Tether should be supported by a dollar in a bank, but the managers of Bitfinex and Tether have struggled to show that they even have bank accounts. Many traders have sold Tether at a loss just to be able to withdraw their money.
The activities of another big stock exchange, OKEx, have also led traders to wonder if they can trust institutions at the center of the cryptocurrency industry.
OKEx, which began in China, changed some trading rules without warning, according to a hedge fund, Amber AI, which published a publishes the changes on Medium. AmberAI said that customers seem to have lost millions of dollars due to changes. OKEx, without recognizing the losses, apologized to customers for some of the changes, which claimed to have been taken to cope with chaotic transactions.
Regulators are collapsing.
Much of the excitement surrounding the cryptocurrency markets last year was stimulated by companies that raised money by selling custom cryptocurrencies in so-called initial offers of coins, which allow start-ups to raise funds without going through the regulators.
At the time, lawyers warned that these offers would probably conflict with the securities rules. The Securities and Exchange Commission has recently intensified the punishment of companies that have violated the securities law with their bids. In the most chilling case, the commission punished two companies on Friday for their first coin offerings, forcing them to return money to investors by saying that the cases would be models of future actions.
Cryptocurrencies are managed by developer communities. This can become complicated.
The Bitcoin network was created with so-called open source software released in the world in January 2009. For many years, members of the Bitcoin community have worked together to improve the software. That collegiality has vanished. Last year, after a bitter fighting, a group released a new version of Bitcoin software with slightly different rules that gave rise to a new cryptocurrency, Bitcoin Cash.
People who supported Bitcoin Cash later had their disagreements. This week, they split into two groups. In the software world, it is known as fork: Bitcoin Cash has been divided into two new cryptocurrencies, Bitcoin ABC and Bitcoin SV.
The new forks did not change the original Bitcoin. But they created chaos in the commercial markets, because exchanges struggle to define which coins are exchanged with customers. The battles have also raised questions about one of the fundamental attractions of cryptocurrencies: their apparent scarcity.
The Bitcoin creator said that only 21 million Bitcoins will be created. But how bad are those 21 million Bitcoins if there are also 21 million tokens for every new script?
Because Naeem Aslam, the leading ThinkMarkets market analyst, put it in note to customers this week: "Forking has become so common as to endanger the notion of limited supply altogether."
Cryptocurrencies were going to solve all kinds of real-world problems. But the real world did not make much sense for cryptocurrencies.
Bitcoin was supposed to facilitate the immediate sending of payments beyond international borders. Ethereum, the second largest cryptocurrency network until recently, was about to create a sort of global super computer. Thousands of other tokens have been designed to be used for high-level purposes. But so far, the only thing for which tokens have been used is speculative trading.
The developers have complained that Bitcoin, Ethereum and most other networks are hampered by technical problems that make their tokens difficult to use in real-world transactions. Those who work on cryptocurrencies have promised solutions, but have been slow to produce them.
Governments could enter cryptocurrencies and do a better job of managing them.
A sign of hope for digital tokens came from Christine Lagarde, leader of the International Monetary Fund. In a speech last week, he explained why countries and central banks may want to issue Bitcoin-like digital currencies. (Some countries are already experiencing this.)
But Mrs. Lagarde added a note of caution. While he says that cryptocurrencies could improve on current payment networks, he also said that governments could manage them more effectively and eliminate the problems of trust that hindered them. The observations could have a chilling effect on existing and non-government tokens.