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.

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 leaving many people in bankruptcy. This was a period when people in 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.

Before the 20089 crash, people were buying loads of houses. Banks on the other hand were giving out funds to people without doing their due diligence. This binge led to a bubble in the housing prices as investors thought that the price will always go up. Ultimately, house prices started to decline and investors lost their funds.

The same is true with the cryptocurrencies industry. People who bought the cryptocurrencies early enough believed solidly in the industry. They believed on the need for an alternative to the fiat currencies. However, as the price started to move up, more investors started getting into the industry for the opportunity that existed. They had no interest in the role of the currencies in replacing the traditional currencies. Instead, they wanted to buy the currencies and exit at a profit.

As the price started coming down, the investors panicked and started selling the currencies. This created more supply and the lack of confidence in the industry. This led to a sharp decline in the industry as the currencies had no buyers.

The biggest lesson in all this is on the perils of long-term investing. While many investors have made a fortune as long-term investors, many have lost money because they did not forecast future changes. For example, traditional wired telephony investors did not forecast the disruptive changes of the mobile devices. Therefore, being a trader can help you take advantage of the short-term movements in asset prices.

___This article was originally published on Forex.info _

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