Lessons From The Crash Of The Cryptocurrencies

After being the best-performing asset class in 2017, this year has been the worst for cryptocurrencies. The total market capitalization of the currencies has declined from more than $850 billion in January to the current $110 billion. The decline has been caused by a series of negative events that have continued to happen in the crypto industry.

In January, the first bad news came when Japan and South Korea announced that they would strengthen the regulations in the currencies. This was big news because the two countries were the major crypto hubs in the region. This news was followed by the ban on ICO advertisements by Google, Facebook, and Twitter, which were the biggest advertising channels for the industry. Without them, it was almost impossible for ICO promoters to get their word out.

This was followed by the increased hackings that have led to more than $800 million coins being stolen. Then, the Securities and Exchange Commission (SEC) announced that it was rejecting a number of ETF proposals because they exposed investors to a lot of risks. All the negative news led to many holders of the cryptos exiting their positions. As they exited their positions, they created more supply than demand. The chart below shows the performance of the major cryptocurrencies in the past few weeks.

(Click on image to enlarge)

The first lesson to learn from the crash is that bubbles will always be here. Historically, bubbles have been there and the results have been catastrophic. In the 17th century, the tulip mania happened which left many people in bankruptcy. This was a period when people in the Netherlands started hoarding tulips on the hopes that their value will triple. Many borrowed to invest in the tulips. Ultimately, the price declined.

In the late 90s, the dot-com bubble happened. This was after the successful IPO of companies like Netscape and Amazon. This led to a craze in the dot-com companies. People, including veteran investors, found themselves buying loads of worthless companies. Others borrowed money to invest in these companies. Like in all bubbles, the price collapsed and investors lost billions of dollars.

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