From Sunday, January 7 to Wednesday, January 17, the global cryptocurrency markets crashed hard, falling by nearly 50% in market capitalization, from over $835 billion to $420 billion. Both the largest, most established cryptos and new, untested altcoins were pummeled. Bitcoin (BTC) fell from a high of $16,275 to a low of $9,005 on the Coinbase/GDAX exchange, and Ethereum (ETH) fell from $1,420 to $757. Altcoins plummeted the hardest, with some like Tron (TRX), Verge (XVG), and Mysterium (MYST) falling over 70% from their all-time highs. Although nobody knows the exact reasons for the crash, some have pointed out that crypto tends to crash in January every year. The two main theories are that Chinese sentiment and investors’ realization of many altcoins’ unreasonable valuations caused this year’s selloff.
In the last week there has been much fear, uncertainty, and doubt (FUD) surrounding China. After the crypto markets nearly recovered from the news that South Korea was considering shuttering exchanges—news that the South Korean government squashed, rumors about China considering totally banning crypto mining and trading put the markets in a tailspin. The Chinese government is reportedly planning to strangle both centralized and local exchanges and to discourage mining. Officials are also considering blocking mobile apps and online platforms that facilitate crypto exchange services. Finally, China has started to crack down on Chinese companies attempting to evade its ban on initial coin offerings (ICOs) abroad. Although no Chinese government officials have commented on the rumors, the circulation of rumors online was enough to induce investors to panic sell.
Another theory is that Chinese investors began to sell because of Chinese New Year on February 16. The idea is that due to the need to spend money on festivities and gifts for family, millions of Chinese people sold part of their assets, including crypto. The theory sounds plausible at first, but it seems unlikely that a single country’s investors were responsible for the loss of over $400 billion in value.
Perhaps the real reason lies in the reality that altcoins especially had reached frothy, irrational valuations. Many “shitcoins,” as the crypto community calls them, or purely vaporware altcoins, without a working product or real-world applications, were exuberantly bought to crazy high prices. Some examples include Tron, Verge, and Mysterium. Tron is a new crypto with a superstar Chinese chief executive, a plagiarized white paper, and a pump and dump that left many early investors as bagholders. Tron reached a lofty valuation of $17 billion before falling to $2.8 billion during the crash. Verge is an ambitious project to be a superior privacy coin, with an emphasis on anonymity. But Verge is not anonymous—its upcoming Wraith protocol has yet to be implemented, and its main privacy feature is vulnerable to blockchain analysis by governments. Verge commanded a $3.5 billion market capitalization before falling to $900 million during the crash. Mysterium is a token that aims to provide decentralized virtual private networks (VPNs) and allow people to rent their unused web traffic. But the token offers few advantages over traditional VPNs, has no working product, and will be delisted from Bittrex. Mysterium had a market capitalization of $105 million before falling to $13 million during the crash. So it is clear that investors cashed out from speculative altcoins to BTC and ETH to help withstand volatility.
Regardless of the reasons for the crash, cryptocurrency does undergo healthy corrections several times a year. BTC, ETH, and other major cryptos have bounced back with decent support. As overvalued coins were humbled and promising coins offered at cheap prices, the crash could have been an opportunity for savvy investors who held strong or bought more. This crash might be a boon for investors’ portfolios, pushing them to respect fundamentals as high-quality coins retrace to previous highs.
The author holds a long position in BTC.