Can altcoins survive $650bn of losses?

Of course they can. It’ll be a wild ride, but cryptocurrencies are here to stay, says Matthew Lynn.

914_MW_P16_city-view

There will always be panics, but the bestwill thrive when the dust settles

Of course they can. It'll be a wild ride, but cryptocurrencies are here to stay.

The altcoin collapse of 2018 is a new addition to the roll call of history's great market routs. In the last few weeks, the market in the alternative digital currencies that sprung up to compete with bitcoin has been completely smashed. Between them, they have lost almost 80% of their value. Within that, there have been some even more spectacular falls. Neo at one point was down by 92%. Cardano was down by 95%. XRP fell by 93% and Bitcoin Cash by 90%.

A catastrophic wipe-out

Overall, the collapse is worse than the dotcom crash of 2000, when, from peak to trough, internet stocks lost a relatively modest 78% of their value. In total, $650bn has been wiped from altcoin valuations. If you take out bitcoin itself, which, remarkably, has stayed fairly stable during the carnage, the numbers look even worse. From a collective market value of $550bn at their peak, all the altcoins together fell to a value of just $78bn. By comparison, Ripple, the third largest cryptocurrency, was once worth $145bn all by itself. The wipe-out has been catastrophic. So that's game over, right? Surely no sane person would want to touch them again?

but expect a comeback

Except, perhaps not. In fact, altcoins can snap back even from a crash of this magnitude. Here's why. First, it's not real money these are digital currencies, so they are definitely not real cash in the sense that the dollar and the pound are. And most people didn't buy at the top of the market. Of course, you can run a calculation of the losses from the peak to the trough and come up with an astronomical number for the losses in the market. But relatively few people will have actually suffered on that scale. In fact, a lot of people will have created altcoins themselves so they will not have actually lost anything at all.

Next, at the start of the week there were already signs that there was a bounce back under way. Ethereum has clawed its way back up from $169 to top $220. Ripple, Litecoin and many of the others have staged similar recoveries. Sure, the prices will bounce around for a while, and no one would be surprised if they weakened a little further again. But buyers are clearly emerging. There is a bottom to the market.

Finally, new industries are always volatile. When any new technology is launched, you expect dozens and dozens of entrepreneurs to throw themselves into the space. That is the process by which new ideas are tried out. Some succeed, most fail. That is perfectly normal, and perfectly healthy as well. No new technology ever emerges completely smoothly. There are booms and busts, and eventually it all settles down. But it can easily be two decades before you get there. Cryptocurrencies still have ten years of wild price movements ahead of them.

In truth, digital currencies are still an exciting new technology. There is a logic to an increasingly digital global economy having a range of digital currencies as well there is something a little odd about every aspect of the economy being digitised while money remains completely analogue.

Meanwhile the blockchain technology that underpins digital currencies has the potential to replace traditional banking and payment systems. And as investors grow more and more disillusioned with currencies controlled by central banks, they will increasingly turn to digital alternatives. The arguments for altcoins haven't changed in the past few weeks just their prices.

Recommended

The days when you could get 7% from your bank are long gone – so what do you do?
Bitcoin

The days when you could get 7% from your bank are long gone – so what do you do?

With interest rates at rock bottom for so long, we’ve been forced to move from saving to speculating to earn any sort of return. Dominic Frisby asks w…
24 Feb 2021
Tesla buys into bitcoin in a big way
Bitcoin

Tesla buys into bitcoin in a big way

Tesla has spent over $1.5bn on bitcoin, driving the price higher, and says it will accept the cryptocurrency as payment for its cars.
11 Feb 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021

Most Popular

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021
House prices: from boom to even bigger boom
House prices

House prices: from boom to even bigger boom

UK house prices have risen to new to record highs, says Nicole Garcia Merida. Demand continues to outpace supply, but continued low interest rates, th…
9 Apr 2021
Nuclear power might never be popular – but now looks a good time to invest
Commodities

Nuclear power might never be popular – but now looks a good time to invest

Nuclear power gets a very bad press, but it is the ultimate renewable energy source. Interest in it is perking up again, says John Stepek. Which means…
9 Apr 2021