In 2008, the world went through the biggest financial crisis in history. There were multiple causes of the crisis, but the biggest one was the collapse of the housing market, and its subsequent effects on the financial system.
Before then, in the United States, banks were lending money to almost everyone, even people with low credit scores. These loans were known as subprime mortgages. After selling the loans, the banks created products known as mortgage-backed securities and collateralized debt obligations, which were based on the underlying mortgage debt. Because of the interconnectedness of the world financial markets, the crisis spread globally once these products lost their value due to the high-risk nature of the mortgages they were based on.
After the crisis, the unemployment rate in the US rose to more than 10% and many people lost their jobs and their houses. This dissatisfaction was pointed to the regulators who were blamed for not doing enough to protect them. The dissatisfaction provided the backdrop that led to the creation of Bitcoin, the first cryptocurrency, by a person/group known as Satoshi Nakamoto.
Early in Bitcoin’s life, a large part of its usage was for transactions online in underground goods such as stolen credit card details, as the participants in the transaction couldn’t be traced, unlike bank or e-wallet payments.
As the popularity of Bitcoin increased, its adoption became more mainstream, spreading to e-commerce sites, and other legitimate uses. More and more cryptocurrencies were also developed. Today, there are more than 2000 cryptocurrencies. Crypto’s rising popularity also led to the increased value of the cryptocurrencies. At the peak in January 2018, the combined market valuation of the currencies rose to more than $850 billion. They were in total more valuable than companies such as Apple or Microsoft.
Then, the prices started to drop. Today, the combined market valuation of the currencies is below $110 billion.
The main reason for the decline is that during the uptrend, most people who bought the currencies did so for investment purposes. They did not do it because of the transactional value that the currencies had. As the prices increased, the main factor for buying crypto became Fear of Missing Out (FOMO). Therefore, as the prices dropped, latecomers to the market suffered losses.
While it’s questionable how long some cryptocurrencies will last, the fact is that the underlying blockchain technology, on which cryptocurrencies are based, is here to stay. People will continue to need the distributed ledger technologies that cryptocurrencies have helped to popularise. However, the industry will likely be leaner and less volatile than it is today.
The rise and fall of crypto is what happens in many young and promising industries. As you may recall, in the late 90s, the obsession back then was on dotcom companies. As a result of the irrational exuberance surrounding this sector, investors rushed to invest in overvalued companies. After the dotcom crash, companies that solved real problems remained and got even bigger, whilst others fell by the wayside.
Therefore, the cryptocurrencies industry will likely see a similar shakeout of overvalued companies and industry consolidation, before it gets better. As a trader, you can participate in the industry by trading cryptocurrency CFDs with a forex broker. The benefit of this is that you can short cryptocurrencies if you believe that their price will decline, which is something a regular crypto exchange can’t offer. If you believe that the price will move higher, you can buy. This allows you to play both sides of the crypto market, whatever happens in the sector.