Photo Credit: Cryptocurrency Market Capitalizations
The crypto-currency complex had a magnificent 2017. Bitcoin jumped in value by a factor of 14 over that period. Ethereum skyrocketed 92 times in price in the same timeframe. Litecoin multiplied in value by 51 times. Ripple soared to 361 times its value at the beginning of the year.
And yet, all is not well in crypto-currency land today. Since the beginning of 2018, a crypto-currency carnage has gripped the markets, sending nearly all crypto-coins plummeting in value. Bitcoin is down -61% since its peak near the start of 2018. Ethereum is off -71% over the same period. Litecoin plummeted -60% over a few short months. Ripple is the big loser among the top crypto-currencies, with a harrowing -85% decline since the beginning of the year.
Now, the true believers out there won’t be nonplussed by this crypto-currency carnage. They will (correctly) point out that crypto-currencies have always been subject to massive and abrupt swings in value. For these devotees, a 100% gain or 50% loss within a few days time is simply the price one pays for being at the cutting edge of money and technology.
But crypto-currency enthusiasts would do well to tread with caution here. I’ve have seen this story before, and the ending is never pretty. I’ve written about crypto-currencies before, but given the speed and magnitude of recent market developments there is an exigent need to reexamine the crypto-asset landscape.
For my first exhibit, I would like to direct your attention to the dot-com bubble of the late 1990s. This mania was driven by the realization that the internet could be used for commerce. Companies like Pets.com (now bankrupt), Yahoo, Kozmo.com (also bankrupt) and Juniper Networks all skyrocketed in value.
Hundreds of technology companies IPO’d with little more than an appropriately tech-oriented name and a vague business plan scribbled on the back of a napkin. Their stocks would often double (or more) on their first day of public trading.
The outcome was as predictable as it was sad. Yes, the internet had vast commercial potential, but precious few of the original dot-com companies lived to see it (Amazon being a notable exception). The tech heavy NASDAQ stock index peaked in March of 2000 and proceeded to plummet by almost 80% over the next 2 1/2 years. Many individual dot-com names went bankrupt, while others simply languished in price for more than a decade. Many surviving technology companies haven’t regained their price peak from those heady days.
In many ways, today’s situation with crypto-currencies is parallel to the dot-com bubble of 2000. Rather than IPOs (initial public offerings) we are seeing rampant ICOs (initial coin offerings) and their conceptual twin, the hard-fork. A hard-fork is when an existing crypto-currency is split into an original coin and a new variant that has slightly different technical aspects.
And, of course, you always see the most ICOs and hard-forks when the demand for new crypto-currencies is strongest (like during a bubble). Let’s use Bitcoin as an example because it is the best known and most liquid of the crypto-currencies.
In July 2017, Bitcoin Cash hard-forked from Bitcoin. In October 2017, Bitcoin Gold was spun off. In November 2017, it was Bitcoin Diamond’s turn. Super Bitcoin hit the virtual shelves in December 2017. And these are just a few of the major releases.
If you are noticing a trend here, you are not alone. Bitcoin hard-forks are being manufactured as fast as possible. And while the ostensible reason is to make needed technical changes to Bitcoin’s plumbing, the real reason is to cash in before the crypto-currency carnage escalates further.
Don’t believe me? Just take a look at this voluminous list of Bitcoin hard-forks and airdrops, almost all of which occurred in 2017 or later (after crypto-currency prices began skyrocketing).
Another way you can tell that the crypto-currency carnage is for real is by simply looking at almost any crypto-currency chart. They all look practically identical, with only minor variations.
The chart at the top of this article perfectly illustrates this point. It shows Bitcoin’s market cap from 2013 until March 30, 2018. There is a long, multi-year period of flat performance, followed by an exponential curve upward in 2017 and then the beginnings of a collapse in 2018.
Every time I have ever seen a chart like this in the stock market, commodities market, futures market or any other market, the outcome has always been the same – either bankruptcy or a return to the long-term trendline. And while crypto-currencies cannot technically go bankrupt, they can become defunct and cease to trade.
I am not so bold as to predict the end of major crypto-currencies such as Bitcoin, Ethereum, Litecoin or Ripple. But even so, a return to their long-term trendlines would be a devastating development for anybody holding them.
For instance, if Bitcoin’s price declined to its long-term trendline, it would imply a value well below $1,000 per Bitcoin – perhaps as low as a few hundred dollars (from over $8,000 right now). Ethereum might trade for $20 or $30 an Ether (down from $500). Litecoin could possibly go for only $5 per coin (versus today’s $131). Ripple might go back to a penny or two each (from $0.67 currently).
I know it seems ludicrous now, but yes, the incipient crypto-currency carnage could absolutely get that bad.
If you are a holder of crypto-currencies, my intention isn’t to scare you. Instead it is to give you a little bit of historical perspective. Crypto-currencies are new and exciting, but they are also thoroughly untested. In fact, since the crypto-currency complex sprang up, the United States and most other developed nations haven’t experienced a significant recession.
In such a scenario, people will desperately need dollars, pounds, euros or yen to pay for their groceries, student loans, utility bills, mortgages and car payments. And with few exceptions, crypto-currencies won’t be acceptable for those debts and obligations.
This is why I advocate using financial diversification to help you avoid the imminent crypto-currency carnage. If you hold a lot of crypto-currencies today, please consider selling a bit and moving the proceeds into cash, high quality bonds, precious metals or other hard assets. You can always reallocate these investments back into Bitcoin, Ethereum, Litecoin or Ripple at a later date – and probably at a significantly lower price, as well.
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