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In December 2017, when its price reached nearly $ 20,000, Bitcoin seemed to have finally shocked the financial markets with the potential to enter the mainstream. A year later and things looked very different. Bitcoin is now in constant trading below US $ 4,000 and has been steadily down in the last year, losing more than half of its market capitalization.
Yet cryptocurrency enthusiasts seem to ignore the fact that Bitcoin could still enter an even more extreme death spiral. Bitcoin is not the only cryptocurrency whose market capitalization has been hammered. The sell offs took place across the board, with the price of major alternative currencies such as Ripple and Ethereum declining in the last year.
It is not clear what the catalyst was for these drops and sales. But what is clear is that cryptocurrency prices struggle to find a plan for a variety of reasons. These range from increased mining costs, regulatory concerns, market manipulation, speculative trading, high energy consumption and growing skepticism both in the public and the global financial sector.
1. Increasing cost of mining activities
If its price continues to fall and extraction costs are not reduced to the same extent, the incentives to update the public ledger and validate transactions can quickly disappear, threatening the very existence of Bitcoin as a viable payment system.
Bitcoin depends on a system of miners that checks the transactions and records them on a digital ledger called blockchain. This prevents the making of copies of digital tokens. As a reward for the energy and time involved, the miners are rewarded in Bitcoin.
But the amount of mining work continues to increase (making it more expensive), as the mining process has always been designed to become increasingly difficult to limit the number of new Bitcoins emitted. Since mining requires large amounts of energy, a number of miners have stopped their operations, as the falling Bitcoin value has made mining less profitable.
This is worrying for Bitcoin's profitability as there must be a minimum number of miners working to keep the register of public blockchains. Without mining, cryptocurrencies are just a set of worthless ciphers. Any rational investor would be outside the mining sector if the cost of mining was higher than the future price.
2. Regulatory concerns
Regulators all over the world are beginning to act on cryptocurrencies with divergent points of view. While countries like Switzerland and Malta are trying to become hubs for cryptocurrency, others like China and the US have focused on cryptocurrency markets.
An example came from the regulator of the American market, the SEC. In November 2018 announced that the operators of two initial coin offerings (ICO) must pay the fines and the refund as they violate the law by selling unauthorized securities. This is certainly not a surprise. In reality, it is probably only the beginning of a decisive intrusion of regulatory bodies into the opaque ecosystem of ICOs. Such a development could be enough to scare some investors to abandon cryptocurrencies altogether.
Supporters of cryptocurrencies insist that more institutional investors will be involved in space with new products such as Crypto-Specified Exchange (ETFs). They expect these to take off in the same way that ETFs have become very popular for conventional investors. But the SEC has not approved any cryptographic ETF, and it would be overly optimistic to assume that this will happen in the near future.
3. Market manipulation
Market manipulation and speculative activity are also important concerns when it comes to the crypto market, which could have been assessed on the basis of recent performance. My recent research shows that well-informed traders buy cryptocurrencies en bloc, which pushes the price upwards and leads other buyers to follow the example, until well-informed traders sell and send down. the price, which again all follow.
Again, this is certainly not a surprise. The cryptocurrency markets are incredibly opaque. Anyone paying attention to cryptocurrency trading knows that this type of pump-and-dump activity and fictitious orders are designed to artificially shift prices, exacerbating price fluctuations at the expense of perhaps unsophisticated retail investors.
4. Energy consumption
A third concern behind the steady decline in prices is the increase in equipment and electricity costs. Bitcoin mining is incredibly thirsty for power. And this energy demand is becoming so high in regions where mining is concentrated, like Canada, that the authorities are starting to deny supply to mining facilities.
Again, this could threaten the very survival of any mining-based cryptocurrency. This represents the overwhelming majority.
5. Skepticism of the industry
The sharp falls in prices are accompanied by persistent skepticism towards cryptocurrencies. To a certain extent this is due to the fact that the promise to bypass the centralized and traditional economic system and to allow peer-to-peer payments has so far been disappointing.
Key players in the financial world, such as Warren Buffett of Berkshire Hathaway and Jamie Dimon, the CEO of JP Morgan, are constantly expressing their deep skepticism about cryptocurrencies, suggesting that Bitcoin and the like continue to face a tough battle for # 39; acceptance.
The only positive side of all this is that although the cryptocurrencies may have entered a deadly spiral, the blockchain economy is here to stay. In addition to enabling secure lending and peer-to-peer transactions, it is used to build more efficient supply chains and the evolution of the internet of things – to name just a few of its applications. This will only grow when it is applied to everything, from education to the media.
