(Shaun Bradley) Investors in both traditional assets and cryptocurrencies have been rocked by huge amounts of volatility so far in 2018. The stock market experienced the largest single-day point drop in history, and bonds have been under pressure as concerns grow about rising interest rates. The most notable price action, however, occurred in the crypto markets as an unprecedented wave of interest overwhelmed this unregulated industry.
by Shaun Bradley, February 20th, 2018
Astronomical gains incurred throughout 2017 created a kind of craze that spread throughout the media and the general public. Outlets like CNBC and Bloomberg were suddenly covering Bitcoin daily and even ran ‘educational’ segments on how to buy and sell Ripple. The timing of their pump was comical and ended up encouraging buyers in at the top without offering any information on fundamentals.
As Bitcoin was trying to establish itself as a household name, the price plummeted from nearly $20,000 to under $6,500, severely punishing enthusiastic bandwagon investors. Veterans of the cryptocurrency space, on the other hand, viewed this drop as an opportunity and were glad to see the weak hands fold. Previous cycles of growth in cryptocurrencies have shown that price volatility doesn’t necessarily reflect the long-term potential or value of a technology. The uneducated optimism that drove the industry market cap to over $800 billion was based largely on speculation. Staying objective and doing proper due diligence needs to be taken seriously when putting money into any asset. These short-term losses are painful but will only strengthen the overall market as newcomers realize the importance of understanding the technology behind projects before getting involved.
Ponzi scheme-style scams had infected the blockchain ecosystem and desperately needed to be cleared before the next phase of mainstream adoption could get underway. Companies like Bitconnect, Onecoin, and USI-Tech suckered thousands of naive people into believing their promises of no-risk investments and guaranteed payouts. These trojan horse companies laid in wait to wipe out investor confidence and make it hard to differentiate between multi-level marketing schemes and quality blockchain projects. Luckily, during this last corrective period, all three were exposed as fraudulent and were shut down by regulators.
Sentiment surrounding cryptocurrencies finally started to shift back into a positive light as Congress hosted U.S. regulators to discuss the future of virtual currencies. The chairman of the Commodity Futures Trading Commission (CFTC), Christopher Giancarlo, and Jay Clayton of the SEC spoke about how these agencies plan on interacting with this new class of assets. One notable part of their testimony was the clear focus on ICOs being classified as securities and therefore under their jurisdiction.
Elizabeth Warren brought up the fact that Initial Coin Offerings had raised $4 billion dollars and asked Jay Clayton how many of those companies had registered with the SEC. His response was an unsurprising zero. The SEC’s imminent registration and disclosure requirements for ICOs may cause some fear, but this kind of recognition by lawmakers will ultimately solidify adoption. However, whether or not any retroactive action will be taken against previously launched ICOs is yet to be determined.
As decentralized systems of payment, cryptocurrencies like Bitcoin and Litecoin have so far avoided being classified as securities. These more fundamental blockchains were addressed in a more optimistic manner by the chairmen. They clearly understand the transformative impact blockchain technology can have on certain sectors of the economy, but the real change is derived from centralized financial gatekeepers finally being challenged by technological innovation for the first time. The layers of control that previously played an integral role in our financial system can now be replaced by trustless networks that are free from corruption, manipulation, and counterparty risk.
The evolution of the blockchain infrastructure can change our daily lives even more than the internet has, and although it is far from the most stable place to invest, the potential growth is unlike anything found elsewhere. Since Bitcoin’s price bottomed out on February 5, there has been a sharp reversal and has recovered back to over $11,000 in just a few short weeks. Young investors who are seeking high returns and opportunity have to choose between either exploring cryptocurrencies or trying their hand at the infamous derivatives market.
Those who aren’t satisfied with the mundane returns of index funds often find themselves speculating on a variety of obscure securities that leverage the performance of things like volatility. An extremely popular derivative known as XIV offers three times leverage, continuously compounding gains so long as market volatility was low. As stocks have increased steadily over recent years, volatility has fallen to historic levels, causing XIV’s value to rise from $38 to a staggering $144 since the 2016 election. These financial tools where being bought by many who didn’t understand or care about the dangers associated with the funds. Everything changed for these supposedly savvy investors when the record stock market points drop sent volatility through the roof. XIV subsequently collapsed more than 90% overnight to a meager $7.35, wiping out some speculators’ entire portfolios.
Established institutions and leaders can no longer be trusted to act in the best interests of their customers or constituents. People can’t afford to become complacent in this rapidly changing economic and political climate and could easily find themselves struggling to simply maintain their current quality of life. The federal budget continues to balloon after the latest $1 trillion dollar a year borrowing disaster. Anyone who believed Trump’s administration would be able to stop this economic debt bomb with some tax cuts and strong trade deals was fooling themselves. The solvency problem of the United States will persist for years to come, and the gradual corrosive effect it will have on the standard of living for millions of Americans will go down in history.
Only time will tell whether the Federal Reserve will step in yet again to further manipulate the economy, but if history is any indicator, then any serious decline in the equity markets will eventually be met with fresh liquidity from the Fed. Becoming informed and acknowledging the realities of the world around you is pivotal when deciding how to adapt in this environment.
The first viable alternative to the current bankrupt system is this new digital economy. It is allowing entrepreneurs to address customer needs without being held hostage by central planners. Blockchain technology is creating unimaginable opportunities as the transition from fiat to crypto continues. Dollar value of digital coins and tokens fluctuates daily, but the knowledge gained through interacting with the technology will be useful for decades to come.
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