Cryptocurrency markets are trading down for the second day in a row. Bitcoin is down to a two-month low, and investors are still pulling their money out of the market. At press time, bitcoin was trading just shy of $8,600, and ether had just dipped below $900. This substantial downturn has cost the virtual market more than $100 million since yesterday, causing many to wonder whether the crypto bubble is bursting before our very eyes.
FOMO and FUD – Flip Sides of the Same Coin
Speculation plays a large role in the world of cryptocurrencies. Typically, companies launching new coins through ICOs do not actually have a marketable product or service. Rather, the coin launch itself is meant to raise the capital necessary to fund operations, research, and development. However, most new crypto companies do not have any customers or ways to make money outside of their coin launch. In fact, few of them even have a working prototype or beta for the project they are funding through their ICO. As a result, most crypto investors are putting their money into companies that have little to no real economic value to support their market capitalization.
This is not to say that none of the new crypto ventures are investment-worthy. We all wish we had the chance to invest in the big tech companies back when they were working out of some genius’ dormitory. However, it does highlight how much the Fear Of Missing Out (“FOMO”) plays into this market.
Pretty much anyone with a credit card and a smart phone can buy cryptocurrencies. With bitcoin prices hitting record highs near $20,000 in mid-December, the market has been flooded with new investors afraid of missing out on the crypto craze. Rather than buying coins based on an objective analysis of the offeror’s fundamentals, many investors are just jumping on the bandwagon. When markets are up, everyone is buying because everyone is buying. When they go down, everyone bails. Again, this decision is not made based on the fundamentals of the investment, it’s made based on Fear, Uncertainty, and Doubt (“FUD”).
It’s only logical for FUD to deflate the FOMO bubble. After all, both are natural reactions for fear-based investors. Buying something you don’t really understand because you are afraid to miss out on is not a prudent investment decision. Similarly, selling out for fear that every downturn in the market is the beginning of a catastrophic crash is also a predictable response for these sorts of speculative investors.
Is This The Bitter End for Bitcoin?
Ok, in all fairness, the FUD is not unfounded. India and South Korea are ramping up regulatory crackdowns over price manipulation and security concerns. One of the world’s largest cryptocurrency trading platforms, Bitfinex, is facing a possible federal enforcement action tied to Tether, a U.S. dollar-tied cryptocurrency owned by individuals involved in the exchange. And of course, there was the Facebook ban and the record-breaking Coincheck hack that bust onto the headlines in just the last few days.
So is this the end of the road for cryptocurrencies? Not likely. Behind all of the speculative price inflation, the blockchain technology underlying virtual currencies is innovative and economically valuable. December saw an over-heated market that was bound to deflate eventually. And even after its massive drop, Bitcoin is still worth nearly ten times what it was this time last year.
Many cryptocurrency investors remain bullish on Bitcoin and its peers. However, there are still some troubling concerns with the cryptocurrency market that may continue to drag down its valuation. Theft and fraud are major issues, and price manipulation is almost certainly occurring to some degree. As regulators continue to dig deeper into the virtual currency market, more information regarding these activities will come to light. Depending on how this all plays out, Bitcoin’s long-term performance is anyone’s guess.