2019’s Crypto Boom: How the Long Winter Ended

April and May saw an infusion of almost $150 billion into the crypto space. Why the sudden surge? Here we examine the factors fueling this remarkable turnaround – from project-specific developments and the release of institutional trading services to the US-China trade war and international hedging against market fluctuations.

The cryptocurrency space peaked at about $830 billion in total market cap in early January 2018. From there, however, the market unraveled and fell in spectacular fashion, losing half a trillion dollars in value over the course of a single month. The market continued to bleed, hitting a low of about $100 billion – representing a drop of almost 90% – by mid-December 2018.

In 2019, however, things started to change. We’ve seen the market double in value – from about $130 billion at the start of the year to about $270 billion today – with most of the gains coming in April and May. Here’s why.

Project-Specific Developments

There are a number of micro as well as macro factors fueling this positive rally. To start with a few low-hanging fruits, consider the upcoming ‘halvening’ of Bitcoin and Litecoin. A halvening is when block rewards for mining are cut in half as a built-in supply-control feature of minable tokens. Litecoin, with a supply cap of 84 million tokens, is expected to decrease its mining rewards from 25 to 12.5 Litecoin tokens per mined block sometime in August this year. Bitcoin mining rewards will also fall but from 12.5 Bitcoins to 6.25 per mined block sometime in May 2020.

Lower mining rewards mean a slower infusion of supply, resulting in higher prices. While economic theory assumes that the effects of halving events are built into token prices (since they are events that are publicly known and are predictable), they have still been known to cause swing markets. This year, Litecoin has appreciated by roughly 300%, from $30 to about $112. Bitcoin performed spectacularly as well, appreciating over 200% from about $4,000 per coin in January to almost $9,000 per coin today. When you multiply those gains across the 17+ million Bitcoin and 62+ million Litecoin in circulation (and if you do the same across all the other major winners from the beginning of the year), its easy to see how we have such a large appreciation of value in such little time.

News and Network Effects

Keeping track of these types of micro and project-specific developments is very important from an investor standpoint as they can have a huge impact on the growth and appreciation of a token’s value. Ethereum sustained double-digit growth over consecutive months (and over 100% gains on the year) in part due to network effects and adoption news (such as Microsoft working on Ethereum integrations with many of their services), as well as development news (such as the project successfully meeting dev milestones toward implementing Proof of Stake mining in lieu of Proof of Work).

Other industry news – some of it unsubstantiated – also helped many high-value tokens to grow exponentially. Bitcoin SV grew over 350% in May alone, in part due to its founder, Craig Wright, claiming to be Satoshi Nakamoto, causing a surge in interest in BSV and people rushing to stack up on what is otherwise a highly contested fork of the Bitcoin blockchain.

Other high market cap tokens such as Ripple saw similar growth, thanks to institutions such as banks either teasing or actually running live tests with Ripple-powered remittances. Even Bitcoin Cash rose in value as it gained ground in the retail space in terms of acceptance as a means of payment. Finally, Jack Dorsey’s Square ventures has also made slow yet steady forays into crypto payments, alongside even Amazon, Whole Foods, and a slew of other established retailers and companies that are all slowly yet surely providing crypto-friendly payment services for their users.

Institutional Interest and Advancements

Let’s now move from small-scale to larger-scale news and developments to see how they have fueled the current rally.

Facebook recently spoke with the Bank of England and other institutions to chart out a path for the release of GlobalCoin – a new token that would likely compete with Ripple in the cross-border remittances space and would help Facebook’s 2.2 billion users send and receive funds with the simplicity of a WhatsApp message – also helped crypto interest add column inches in international media.

Facebook’s timing is interesting, as it coincides with a number of other important growth-side factors for cryptocurrencies as a whole. Finally, the Bakkt has announced that it will open futures trading, hedging, and related services to institutional investors sometime in the near future. The Bakkt was formed by the Intercontinental Exchange, a leading operator of global exchanges, clearing houses, data, and listings services, and is the parent company of the New York Stock Exchange, the world’s largest stock exchange, currently worth more than $20 trillion. The Bakkt will do this by leveraging the services of Microsoft Azure – another feather in the cap of network effects – and is likely the most highly-funded crypto services provider that will finally bring institutional investors to the crypto space in droves.

In addition to Bakkt news, the crypto space experienced a frenzied uptick when EOS first teased, and then announced, a truly decentralized social media platform that would rival Facebook but would not use and abuse user data but would help them monetize their data and content themselves. The EOS blockchain accounts for 60% of all blockchain transactions and is, in fact, competing with Tron as the most highly used and preferred SDK for blockchain development. Tron itself saw the release of numerous new DApps and grew almost 200% since the beginning of the year as well.

Thanks to these leading blockchain platforms not only gaining users but releasing apps and services while providing better and more advanced services, we have solid use cases for the utility of cryptocurrencies that have helped in adoption and growth of the space, both for established players as well as new entrants and smaller concerns as well.

Trade Wars

As we chronicled here, the US-China trade war has hit the stock market hard. Tariffs and taxes imposed on the goods and services of global trading partners make those items more expensive and less attractive to the local consumer. As a result, prices rise, usually on both sides of the fence in the event of retaliation, causing a fall in company profits and a fall in stock prices. Capital flight also occurs and is common in times of global turmoil when money leaves from investments of higher risk to investments of lower risk.

While cryptocurrencies are notorious for their volatility, they have become an increasingly attractive option for investors looking for alternative avenues to store their wealth in the face of market uncertainty. While the global standard for storing wealth has long been gold, gold has high storage costs, limited uses, and is much harder for the average person to stock up on in times of market crisis. Bitcoin and cryptocurrencies, on the other hand, can be purchased within minutes, cost nothing to store, are highly liquid, and can be bought and sold by anyone at any time.

Beyond China, the crypto space further benefitted – and the stock market was further hit – by news of potential US tariffs on Mexico, a move that, if retaliated against by Mexico, would hurt the sale of US goods and services to America’s third-largest trading partner (with the #1 spot understandably held by global behemoth China).

The Bottom Line

When you take the combined effects of project-specific news and developments, each of which can lead to double and triple digit growth, it is easy to see how the crypto space can so easily add or shed tens of billions of dollars in a matter of hours or days.

What makes 2019’s rally unique, however, is the perfect storm of industry-specific news combining with developments of a global scale (trade wars) and the blossoming of the crypto space as a whole (the introduction of enterprise-grade services and steady adoption hitting its stride with large corporations) that finally put the crypto winter of 2018 to rest and has set the stage for a very interesting remainder of the year.

Market swings are common in the cryptocurrency space; none of this is intended to be used as investment advice.

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