Greed and Fear in the Recent Downward Trend in the Cryptocurrencies – Introduction
August was a mixed month for cryptocurrencies. As the chart below shows, Bitcoin ended the month higher by 2.50%. On the other hand, its peers had a rough month with Ethereum, Ripple, and Litecoin falling by 30.5%, 24%, and 16% respectively. In this article, I will provide the monthly outlook for the cryptocurrencies.
The history of cryptocurrencies is well known. After the 2008/9 financial crisis, a person/group using a pseudonym of Satoshi Nakamoto published a white paper on a decentralized currency. The currency he envisioned would get rid of the central bank and promote anonymity. The currency would be produced using a secure technology known as blockchain.
At the time, the need for such a product was there because people had given up on the regulatory agencies. They had let them down by not maintaining close checks on the financial industry. The earliest adopters of the new technology were cybercriminals who loved the anonymity the currencies provided. It was adopted by a deep web website known as Silk Road. Silk Road was a website that allowed people to buy anything including drugs and weapons.
The promise of Bitcoin was enormous. It would make international trade better by removing the exchange rates. It would also remove the middlemen like banks who make good money on international transfer. It would also be protected from the movements of interest rates. As it grew in popularity, Bitcoin would replace the fiat currencies.
Today, things have changed and the promise of Bitcoin is uncertain. First, mining Bitcoin has become an expensive endeavour, with many miners being unprofitable. Second, the cost of transferring Bitcoin has become higher than that of fiat currencies. Third, Bitcoin has become less safe as exchanges become vulnerable to attacks. Fourth, Bitcoin has become more volatile making it difficult for retailers to accept it.
As Bitcoin has moved from being the future of retail, traders have changed tone. Today, the talk is that Bitcoin is the digital version of gold as its supply becomes scarce. Gold is used by investors as an insurance policy against risks. They hope that in case of a financial crash, gold will still be valuable. However, Bitcoin cannot be a digital gold. This is because in case of a crash, a volatile ‘asset’ like Bitcoin is the last thing you want to own.
The rise of Bitcoin lead to other cryptocurrencies known as altcoins. Some of these currencies are Ethereum, Ripple, EOS, and Litecoin. It also lead to a new way for companies to raise money known as Initial Coin Offering (ICO). These ICOs have been proven to be fraud. This is because of the opaqueness of the industry. These days, anyone with an idea can start his own ICO without any product at all. Already, traders have lost billions of dollars worth of ICOs.
As the price of Bitcoin rose in 2017, it attracted more demand. This was a classic example of the old saying of the financial market. Greed attracts more demand. This year, the greed has turned to be fear. This fear has seen the cryptocurrencies fall by more than 50% this year. Fear leads to sell-off as holders exit their positions. This decline is likely to continue as the industry lacks positive news to support the development.