The cryptocurrency sky fell yesterday as 49 of the top 50 coins (by Market Cap) were down with only Tether (USDT) posting a gain. In fact, only two coins, KuCoin Shares and VeChain, showed losses less than 10 percent and only 12 of the top 50 have lost less than 20 percent of their value.
The effects of the market-wide shock are clear, but explanations vary based on where you get your news. In an effort to make sense of the situation, here are the stories and rationales explaining the systemic drop.
Korean leadership this week has been fragmented on the subject of cryptocurrencies, causing a public backlash in a country that has enthusiastically embraced the new asset class.
On January 16, 2018, Yonhap News reported that the Prime Minister Lee Nak-yon stated, “What the justice ministry is going to do is not immediately shut down (exchanges) … As this is a legislative issue, it is not possible to shut them down without going through the National Assembly.”
This seemingly contradicts a radio interview given earlier in the day by Korea’s finance minister, Kim Dong-yeon, who stated in a radio interview with TBS Radio, “The government stance is that it needs to regulate cryptocurrency investment as it is a largely speculative investment … The shutdown of virtual currency exchanges is still one of the options (that the government has).”
The perceived discord from top Korean officials is a carry over from January 11, 2018, reports where Justice Minister Park Sang-ki stated regulators were preparing legislation to halt cryptocurrency trading. Those statements were walked back by the presidential office (The Blue House) later in the day, when a spokesperson relayed that the government has not yet decided on shutting down cryptocurrency exchanges. This statement came a mere seven hours after the Justice Minister’s statements and after a petition to the presidential office gained viral support. This communicative disharmony doesn’t even address the raids on Korean exchanges Coinone and Bithump last week.
Bloomberg (which also cites China as a causal factor), New York Post, MarketWatch, and others have cited the latest actions today by South Korea as an inciting reason for the digital currency market-wide bloodbath.
China Threatens More Bans
Korean Leadership may not be the only source of consternation for the cryptocurrency market. Some media outlets, such as Quartz have pointed towards Korea’s much larger neighbor to the West, China.
China has had a tumultuous history with cryptocurrencies. In the past few months alone, the Central Bank of China banned ICOs in September 2017, followed by a January 2, 2018, leaked memo where the leading internet-finance regulator in the country, the Leading Group of Internet Financial Risks Remediation, called for an orderly exit of crypto-mining operations. The forced exodus of crypto-mining operations, according to TechCrunch, will slowly extinguish a group that is estimated to produce three-quarters of the world’s supply of bitcoin.
The final straw for the China thesis were reports on Monday, January 15, 2018, that the Chinese government is escalating its crackdown to include domestic cryptocurrency trading by planning to block access to online platforms, exchanges, market-makers and mobile application platforms that cater to Chinese citizens.
While Chinese citizens have in the past used VPNs to work around similar blocks to sites such as Google and Facebook, China has been determined to stem capital outflows from the country (and the government has ordered a crackdown of VPN usage starting next month).
Cryptocurrencies have provided the potential for unregulated outflows of capital from the mainland, so it seems that the cryptocurrency facilitators in China may face a different fate than their internet counterparts.
The U.S., Brazilian, Indian, French, German Regulator Effect
Regulation is the name of 2018. If the regulatory issues out of South Korea and China were standalone examples, that may be enough to explain the sell-off. But other regulatory fears may have been increased by a flurry of announcements over the past week:
On January 12, 2018, U.S. Treasury Secretary Steven Mnuchin mentioned a working group comprised of multiple federal agencies had been formed to look into how to regulate cryptocurrencies.
That same day, Brazilian regulator CVM banned funds from buying cryptocurrencies.
On January 14, 2018, The Hindustan Times reported the Indian government has formed a committee to fast-track the country toward regulating the domestic cryptocurrency marketplace. In line with previous efforts by Indian Prime Minister Narendra Modi to demonetize lower denominated rupees last year, the committee was formed, according to The Financial Express, based on Indian authorities’ apprehension of illicit money being used to trade cryptocurrencies (colloquially referred to as “black money”).
On January 15, 2018, French Minister of the Economy Bruno Le Maire announced the creation of a working group with the purpose of regulating cryptocurrencies and appointed Jean-Pierre Landau, the former deputy governor of the Banque de France, to lead the group. Landau wrote an editorial piece for the Financial Times in 2014 titled “Beware the mania for Bitcoin, the tulip of the 21st century.”
Also on January 15, 2018, a board member for Germany’s Central Bank (Bundesbank), Joachim Wuermeling, called for effective regulation of virtual currencies on a global scale.
The Post-FOMO FUD Factor
The cause for the market wide plummet yesterday in cryptocurrencies could simply be a case of FUD (“Fear, Uncertainty, Doubt”) among new investors panic selling in the face of all of these regulatory actions or initiations by major world economies. Or perhaps it is entrenched investors taking regulatory actions as their signal to sell before regulations negatively impact their unrealized profits.
It may be a combination of events and speculation. The news reports differ on what events are emphasized depending on what coverage you look at (and if you look to John McAfee for causation, you’ll note the market drop was all because of J.P. Morgan spiking fears about potential government bans).
Regardless of the cause, the effects are clear. It now remains to be seen whether there will be a rebound or whether the sell-off will gain momentum as we look ahead to a future where regulatory impacts potentially curtail the bull-run the industry blossomed under in 2017.
Andrew M. Nelson is a researcher and analyst of alternative investments. While in law school, he was drawn to cryptocurrencies by the potential impact of smart contracts on international trade. After years of analyzing alternative investment funds, he uses his JD and MBA to analyze regulatory and investment trends on new, alternative, and illiquid asset classes. You can follow Andrew on Twitter @Andrew_M_Nelson