The world of cryptocurrencies experienced a crash, this past June, but rebounded quickly. All cryptocurrencies rose in value after a brief, but significant, drop. The first cryptocurrency, Bitcoin, reached the significant $2,500.00 level when it bounced back after this “flash crash” occurred. Ethereum, the second-largest cryptocurrency, crashed spectacularly, with its price dropping down from $317.81 to just $0.10 in under one second. The primary catalyst was a sale of 39,300 units for $12,500,000.00. This crash is under investigation from a financial watchdog.
Cryptocurrencies recently experienced another crash – this one tied to China’s ban on Initial Coin Offerings (ICO), as the Chinese government considers them unregulated sales, and thus, against Chinese law. China was the first government to support cryptocurrencies. At first blush, this ban appears to be a negative action against the fledgling currency, but when you look closer it appears the Chinese are attempting to block one of the major drawbacks to cryptocurrency – its affinity for fraud and illegal activities. ICOs are made when an entrepreneur or a scam artist wants to raise lots of capital without pesky regulations or accountants getting in the way.
According to Binary.com founder and CEO Jean-Yves Sireau, however, cryptocurrencies have nothing to worry about in the long run:
"China's ICO ban and restrictions on centralized cryptocurrency exchanges has led to increased volumes of peer-to-peer cryptocurrency trading, as seen on localbitcoins.com, and is hence likely to shift trading from centralized to decentralized venues without having any real long-term impact on the uptake of cryptocurrencies"
The biggest advantage of cryptocurrencies is their decentralization; as they don’t play in the world of central banks, they are not subject to arbitrary confiscation. The little-known regulatory changes recently implemented by the G20 are going to catch the American general public by surprise when the next financial crisis occurs, and a new one is on its way. It’s just a matter of time until short-sighted politics and greed come together once more.
Cryptocurrencies are in their infancy; as they grow, and become more acceptable, crashes in the market are inevitable. Cryptocurrencies are, at this stage of the game, volatile; it’s this volatility that prevents them from meeting one of the three criteria for money – being a stable source of value. New cryptocurrencies are coming into the market rapidly, and it’s a given some of them are going to fail. The market is, in consequence, going to be in a “crash and recovery” mode until the cryptocurrency market matures and settles down.
That being said, the investor in the cryptocurrency market needs to buckle their seat belt and settle in for a long ride. Taking money out of the market on occasion is not a bad thing, but they should do it only when they need the money for something else. If investors react to every fluctuation in the market, they will be living their own private 1929 crash over and over again. Investors should take a long-term view of their investment and keep their head up during the short-term hysterics.
Recovery of the cryptocurrency market is just as dramatic as the crashes. Cryptocurrencies can fall from lofty heights down to pennies faster than the investor can blink. The currencies also recover just as fast, reaching new highs, in value. It’s not a market for those with weak constitutions – investors need to be able to hang on until the currency recovers.