Just a couple of weeks ago, cryptocurrencies were all the rage. The value of most digital tokens was through the roof. Search volumes for cryptocurrency topics broke all-time highs. And the next wave of crypto buyers couldn’t wait to get in. And then came last week, when a massive crypto crash wiped out a stomach-churning $1 trillion in market value. What happened?
Zillions of Digital Coins
Cryptocurrency is a digital, alternative payment method that is usually decentralized. Meaning it isn’t under the control of one central bank or authority. The pioneering and most popular cryptocurrency, is Bitcoin, with a market share of around 60-65%. That’s around five times more than the world’s second most-popular cryptocurrency, Ethereum.
But nowadays, there are many Bitcoin alternatives – known as “altcoins”. According to CoinMarketCap, there are currently 5,268 digital currencies in existence. The top five (Bitcoin, Ethereum, Tether, Cardano, and Binance) represent about 80% of the sector’s market value.
There are also thousands of “dead coins”. Dead coins are cryptocurrencies that no longer exist. Some of these digital coins were outed as scams, others just collapsed, suffered devastating hacks, or simply fell of the radar as no one uses them anymore.
Many Different Types of Cryptocurrency
Not all digital currencies are of the same type. Bitcoin, Ethereum and Litecoin, for example, are payment-focused digital assets. While Dash is a more secretive form of cryptocurrency, offering nearly untraceable transactions. Tether, on the other hand, is a stablecoin, meaning it’s linked to an underlying asset, like the US$.
Further, there are many different types of digital tokens, that only unlock access to particular products and services. This can be anything, from software to rewards. Finally, there are Central Bank Digital Currencies, which are government-issued and under central control. This is in contrast with the likes of Bitcoin and most other cryptocurrencies mentioned in this article.
It speaks for itself that the choice can be overwhelming. Nonetheless, people, and especially millennials, have embraced cryptocurrencies. According to a study by Mastercard, 4 in 10 people across North America, Latin America and the Caribbean, the Middle East and Africa, and Asia Pacific say they plan to use cryptocurrency in the next year. Crypto trading platform Gemini estimates that nearly 14% of the US population owns cryptocurrency. They expect this figure to double in 2021.
Then There’s Musk…
Elon Musk, centibillionaire, founder of Space X and product architect of Tesla, is without a doubt one of the most important crypto-influencers. Since last year, he has launched a series of tweets to his 55.7 million followers in support of cryptocurrency and especially Dogecoin, a cryptocurrency that started as a joke.
In February, Musk announced that Tesla was buying $1.5 billion worth of Bitcoin and would start accepting the cryptocurrency as payment for their cars. As a result, the Bitcoin price rocketed to the then all-time high of $43,730 per Bitcoin. After that, there seemed to be no end in sight; Bitcoin just kept on skyrocketing. A month ago, the digital currency hit the astronomical $64,000 mark.
Fast forward to May 12, when Musk made a U-turn and walked back on Tesla’s commitment to accept Bitcoin as payment. The currency almost immediately dropped by 12% and the digital currency market has been shaky since.
… And China
The big crash came last Wednesday, when the Chinese government more or less prohibited financial institutions in the country from doing anything with cryptocurrencies. They also warned businesses to not accept digital currencies. That is, except their own: China is namely trialing their own crypto alternative, called Digital Currency Electronic Payments (DCEP), or the digital yuan.
In a joint statement, three state-backed financial organizations announced that their members were no longer allowed to give customers access to crypto platforms for trading and storing digital coins, citing their volatility and potential ties to money laundering.
The decision was the latest in a long series of steps taken by the Chinese government to impose increasingly strict rules for mining and trading cryptocurrency. The threat of strict regulation triggered a panic, especially after Musk had already stirred the market a week prior. Crypto values plummeted, with Ethereum nosediving 40%, while Binance and Dogecoin lost some 30%.
Crypto Scams Thrive
Also concerning is the immense spike in cryptocurrency scams. In mid-May the Federal Trade Commission released data showing that, since October 2020, US citizens lost more than $80 million in cryptocurrency investment scams.
The study explained that cryptocurrency investment scams take on many forms. “Sometimes they start as offers of investment tips or secrets in online message boards that lead people to bogus investment websites. Another common form of the scam involves a promise that a celebrity associated with cryptocurrency will multiply any cryptocurrency you send to their wallet and send it back.”
In fact, last October, consumers reported losing millions to scammers who impersonated celebrities and tech companies like Elon Musk, Bill Gates, Barack Obama, Joe Biden, Jeff Bezos, Kanye West, Kim Kardashian, Apple, and Uber on Twitter. And in April, malicious code stealing crypto wallets had been identified in 49 Chrome Extensions.
So, Should I Still Invest in Bitcoin?
Well, if your stomach is up for it. And if you’re ok with more and more scrutiny. Worldwide, governments, policy makers and treasuries alike have announced that they will take a more active role in cryptocurrency regulation.
In the short term, more regulation will likely cause the shadier digital wallet owners a lot of pain. In the long term, however, more regulation would increase the legitimacy of some cryptocurrencies and normalize the cryptocurrency exchange.
All in all, Bitcoin is still up 400% compared to the start of 2020. It rebounded to $36,600 today. Not bad, if you bought 1 Bitcoin for around $7,000 in January last year. If you want to know more about how to buy and sell Bitcoin safely, you can read our article here.