According to Jonathan Cheesman, a partner at investment firm Distributed Global, Bitcoin has fallen due to five major reasons: macro trend, speculative dominance, regulatory uncertainty, short selling, and scams.
But, as the market and cryptocurrencies as an asset class continue to see improvements in infrastructure and regulation, Cheesman explained that a growing number of investors will recognize cryptocurrencies as robust and legitimate stores of value.
“For some, things are even more acute now — Venezuela and Turkey being the most obvious examples — and debt sustainability is a real risk to many fiat currencies. In looking for global stores of value gold has served a purpose, but it is archaic. A digital store of value is both more practical and more in touch with the growing millennial generation.”
Regulatory Uncertainty and Weak Infrastructure
Up until 2018, infrastructure targeted at institutional investors and large-scale retail traders was virtually non-existent. The last barrier between institutional investors and the cryptocurrency market that is custodianship was not eliminated and there were very few publicly tradable instruments that could facilitate the demand for cryptocurrencies from accredited investors.
The weakness in existing infrastructure along with regulatory uncertainty around cryptocurrencies prevented large sums of capital flowing in from the broader financial market to the cryptocurrency sector.
Hence, the speculative bubble of the cryptocurrency market in 2018 was similar in concept to previous bubbles in 2012 and 2016 in that the on-going correction was triggered by the panic sell-off initiated by speculators and individual investors in the market.
The 80 percent correction of the cryptocurrency market occured in a similar way as previous drops, but the expected recovery of the market will drastically differ from previous attempts.
In the past, Bitcoin had failed to secure momentum at major support levels and demonstrated no signs of recovery for over two years. This year, Bitcoin has made three attempts to break out from the $6,000 support level, and, although they were unsuccessful, Bitcoin has not fallen significantly below the $6,000 support level.
But, as regulatory frameworks and trusted custodian solutions in the cryptocurrency market continue to improve, more institutions will be willing to take a big risk to commit to a market that is at its early phase.
“Regulators across the globe have struggled with how to responsibly police crypto. A decentralized movement poses a lot of complications in classifying the assets and bad actors muddy the water. As a result, things have been moving fairly gradually, but overall regulators have taken a tone that shows they respect the potential innovation. The regulatory uncertainty has in turn slowed institutional investors, as have the lack of custody, insurance, data and risk management solutions.”
Progress in South Korea and Japan
Already, South Korea and Japan have introduced cryptocurrency and blockchain-related legislation to govern the crypto and blockchain industries as legitimate sectors.
On September 8, CCN reported that the government of Uzbekistan has decided to legalize cryptocurrency exchanges, initial coin offerings (ICOs) and digital asset mining.
As billionaire investor Mike Novogratz previously said, it is entirely possible that the next long-term rally of cryptocurrencies will be led by institutions like pension and hedge funds, given that robust custodian solutions are likely to see adoption in the months to come.
. Charts from TradingView.