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?
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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.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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