What Cryptocurrency Traders Can Learn From 2018

Digital currency traders can learn quite a bit from what happened in the market in 2018. If market observers conceptualise 2017 as the year that cryptocurrency investors drank too much, 2018 was when they felt the hangover. The digital currency markets flourished in 2017 and gained significant value while attracting significant interest from investors. However, they crashed the following year, alienating some who had put their faith in this asset class.

Crypto Market Fluctuations

Probably the easiest way to illustrate the significant changes that cryptocurrency markets experienced in 2017 and 2018 is to review the changes in their total market value. In 2017, this total value climbed from roughly US$17.7 billion to approximately US$609.3 billion, a gain of more than 3,000% according to CoinMarketCap figures.^[1]

On 7 January 2018, the total market capitalisation of these digital assets peaked, reaching US$835.7 billion.^[1] This figure represented a more than 4,600% increase from the start of 2017. The market for these cryptocurrencies didn't maintain its lofty value for long, though, and plummeted to less than US$250 billion by April 1.

The market managed to bounce back, but it went on to suffer additional losses and finished the year at US$126.1 billion.^[1] This represented a roughly 85% decline from the all-time high and a nearly 80% decrease from the start of 2018.

It is worth noting that the largest digital currencies by market cap performed better than the smaller ones and suffered less severe declines. The MVIS CryptoCompare Digital Assets 5 Index, a market cap-weighted index that follows the five largest digital assets, finished 2018 down 84% from its all-time high on January 6 and roughly 79% for the year.^[2]

In comparison, the MVIS CryptoCompare Digital Assets 100 Small-Cap Index, which tracks the smallest 50 of the largest 100 digital assets, ended 2018 down 94.4% from its all-time high and approximately 90% from the beginning of the year.^[3] The difference between the performance of the Digital Assets 5 Index and the Digital Assets 100 Small-Cap Index shows that the larger cryptocurrencies fared better when the broader cryptocurrency markets crashed.

ICO Market

Any analysis of the 2018 digital currency markets would be incomplete without taking a look at initial coin offerings (ICOs), sales that allow investors to exchange Bitcoin, Ether and in some cases fiat currencies for newly minted digital tokens.

During 2017, 966 of these offerings reached completion, raising US$10 billion, according to ICObench data.^[4] The next year, 2,284 ICOs were finished, raising US$11.4 billion, a 14% gain. While there was a modest increase in the total amount generated by these offerings, it coincided with a more than 135% spike in the number of sales.

The average ICO in 2017 brought in roughly US$24.4 million, compared to approximately US$11.5 million the following year.^[4]

When 2018 is broken down into different time periods, ICObench data reveals that these token sales enjoyed strong growth in performance during the first half of the year, which declined significantly later on.^[4] More specifically, these offerings raised close to US$1.75 billion in March, while they generated less than US$400 million in November.

While ICOs brought in significant funding for entrepreneurs in the blockchain and digital currency space in 2018, many of the tokens they issued suffered sharp declines in value, according to market research conducted by professional services firm Ernst & Young.

The company performed an analysis in December 2017, which looked at more 350 token sales that generated US$3.7 billion in funding.^[5] A fraction of these ICOs, of which there were more than 110, raised 87% of all funds generated at the time.^[5] Roughly 7 in 10 of these high-performing token sales took place of the Ethereum platform.

The report's authors report pointed to problems like insufficient due diligence and an absence of fundamental valuation methods as causing sharp price volatility in the value of digital tokens issued through ICOs.^[5] At the time, Paul Brody, Ernst & Young's global innovation blockchain leader, offered a word of caution regarding the rising incidence of these offerings.

"As ICOs continue to gain popularity and leading players emerge globally, there is a risk of having the market swamped with quantity over quality of investments," Brody stated.^[5] "These high-risk investments and the complexity of ICOs need to be managed to ensure their credibility as a means of raising capital for companies, entrepreneurs and investors alike."

Ernst & Young released a second analysis in October 2018, which took a second look at the token sales that represented 87% of ICO funding in 2017. Of these offerings, 30% had "lost substantially all value" and 86% had tokens that were trading below their sale price. Further, less than 30% of the ICO projects involved in this study had produced either working products or prototypes.

The gains enjoyed during this period were concentrated in a very small group of token sales.^[7] More specifically, the top 10 ICOs experienced virtually all gains generated during the period. These offerings primarily involved blockchain infrastructure.

Again, Brody provided a cautionary point of view. He said, "Despite the past year's hype around ICOs, there appears to be a significant lack of understanding around the risks and rewards of these investments."^[7]

"In addition, there is a disparity between those who invest in ICOs and the ICO project developers regarding the anticipated timelines of ROI," Brody continued. "While ICOs are an entirely new way to raise capital, those participating should understand that there are factors – such as the slow progression toward working product offerings – that can introduce greater risk in ICO investing."

Venture Capital Funding

Another major source of funding for projects in the digital currency sector was venture capital (VC) firms, which contributed US$2.2 billion to blockchain and digital currency companies based in the U.S. and US$4.6 billion globally.^[8] While the U.S. figure represented a close to four times increase from 2017, the global figure was a more than four times increase from that year.

Digital Currency Group (DCG) was the most active VC firm in this space, securing more than 100 deals in the first three quarters of 2018, according to Pitchbook data reported on by analytics firm Diar.^[9] Pantera Capital and Blockchain Capital were runners up in this respect, having made a combined total of 100 deals during the first three quarters of the year.

Several deals crumbled in late 2018, Barry Silbert, the founder and CEO of DCG, said on Twitter.^[10] He tweeted, "We've seen half a dozen fundraising deals fall apart over the past month after the lead pulled out. All is not well in crypto VC investor land. Good time to remind founders that a signed term sheet does not equal cash in the bank."

"The VCs disappear when markets are down, and flood back in when markets are up," said Erik Voorhees, founder and CEO of exchange ShapeShift.^[11]

Cryptocurrency Adoption

Both investors and users continued to embrace digital currencies in 2018, according to market research. Cryptocurrency exchanges experienced record trading volume during the year, data provided Diar reveals.^[12]

The value of U.S. dollar trades taking place at Coinbase, for example, climbed 21% in 2018 from the year before.^[12] Kraken, a U.S.-based cryptocurrency exchange, saw this dollar trading volume increase 192% between 2017 and 2018, while Bitfinex saw a 50% gain.

Users sent more than US$3.3 trillion using Bitcoin in 2018, which was six times the monetary value that people transferred via PayPal, according to data provided by Satoshi Research.^[13]

Additional data shows that Bitcoin's total Layer 1 transaction volume grew in 2018, reaching US$3.2 trillion.^[13] The median year-on-year change for every day in the year climbed 2.9%. Satoshi Capital data also shows that market participants traded more than US$2.2 trillion of the currency in 2018, a figure that was six times the volume for the Bulgarian lev.

More than 139 million user accounts existed when the Cambridge Centre for Alternative Finance released an industry report in December 2018. At the time, the number of identity-verified cryptocurrency users was at least 35 million.

Another indicator of cryptocurrency's rising adoption is the growth in the number of Bitcoin ATMs. The total number of these machines rose to 4,000 by the end of 2018, according to a tweet from developer Jameson Lopp, which cited coinatmradar.com data.^[15] "The number of Bitcoin ATMs doubled to 4,000 in 2018, continuing a 3 year trend of 100% year over year growth," Lopp said.

This figure represents significant progress, seeing as how the first Bitcoin ATM became available in 2013.^[16]

Summary

2018 clearly had its ups and its downs. The broader value of the cryptocurrency markets crashed, causing these digital assets to lose significant value. Also, projects holding ICOs in 2018 brought in roughly half as much on average as those taking place in 2017.

These developments may hold excellent lessons for crypto traders, as the sharp rise and fall of digital currency prices has been largely attributed to the sentiment of investors. At the same time, the cryptocurrency space made progress, as venture capital firms contributed more than US$4 billion to digital currency startups worldwide, and various measures of adoption showed improvement in 2018.