- What the hell happened to crypto this year?
- The bubble
- Other early warning signs
- Lack of institutional support
- Internal battles
- Is there any hope?
- Stay safe while trading cryptocurrencies
- 1 Don’t put all your eggs in one crypto basket
- 2 Keep your computer and your data safe
- 3 Do your research before investing in ICOs
- 4 Become immune to FOMO
- 5 Understand leverage
- Digital money decoded
- CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Capital at risk
- Cryptocurrencies and ICOs
- How cryptocurrencies work
- Types of cryptocurrencies
- Using cryptocurrencies
- How initial coin offerings (ICOs) work
- ICO white papers
- The risks of investing in cryptocurrencies and ICOs
- Fewer safeguards
- Values fluctuate
- Your money could be stolen
- Cryptocurrency scams
- ICO scams
What the hell happened to crypto this year?
It seems all too fitting that ’s plans to launch a digital coin were leaked in the second-to-last week of a year that saw the tech giant’s reputation pummeled and cryptocurrencies crash and burn. It’s grilling a shit sandwich over a dumpster fire.
Bitcoin–and the cryptocurrency industry as a whole–plunged this year, after a gravity-defying surge in recent years. The price of the digital coin hit nearly $20,000 late last year. And then in early 2018, it began to fall. Though it hit a few plateaus, the price has still tumbled; today it hovers at a little over $3,000.
So what happened? And is there any hope for a recovery? To answer both, you have to look at quite a few factors.
When bitcoin was rising last year, it seemed a trend everyone from your grandmother to your barista was suddenly becoming hip to. Of course plenty of folks cautioned that it could be a bubble, but it’s always hard to realize such a thing when you’re in the midst of it. It’s free money, right? Why not get in on it? (Just don’t remortgage your house!)
All the signs, however, were there. previous bubbles, people were basing their belief in the cryptocurrency on their emotions, not any intrinsic value. Then there was the FOMO element, which only compounded things.
Essentially, bitcoin became an international fever. Random companies were “pivoting to blockchain” for no apparent reason other than that it seemed a way to create buzz.
But when the bubble bursts, FOMO turns into fear of losing, which makes for an especially rapid plunge.
Among those who called it, hedge fund manager Mark Dow wrote almost exactly a year ago about his decision to short bitcoin after future trading on it first began:
But this time feels different. It feels a bubble. The fever in the post-Thanksgiving moonshot ran hotter than we’d seen before. We also began to see a robust supply response.
Bubbles are complex dynamics. What they all have in common, however, is they require emotion to truly go parabolic. Moreover, the less we understand the object of the bubble, the greater the scope for greed and FOMO to fill in the blanks.
Dow, at the time, simply could not come up with a good reason for the crypto’s insane performance. The only logical explanation: It’s a bubble. His views were especially prescient. He told Bloomberg this month that he made a profit twice due to this canny call.
Other early warning signs
But to understand the dynamic that led to this year’s depressing year for crypto, we actually should start a few years before 2018. In bitcoin’s early days, Mt. Gox was the go-to service for handling transactions.
Then, in 2014, it halted transactions and slowly copped to a crypto-hack to the tune of $473 million, the biggest hack of its kind at the time, and it gave many people pause.
But it was still early enough for people to believe that the blockchain system was still getting all the technical kinks out.
But the hacks didn’t stop. In 2016, the DAO–a blockchain organization that was Ethereum–lost what was worth $50 million at the time, due to a technical error someone seized upon. This, once again, sent shockwaves through the community–but also had the unfortunate impact of normalizing these types of hacks for some people.
At the end of 2017 and beginning of 2018, more people–especially those in the mainstream finance world–were paying attention to bitcoin and cryptocurrency trading.
And in early January 2018, the Japanese exchange Coincheck disclosed a hack worth a whopping $534 million.
This happened right around the time that bitcoin slipped from its peak value, and it certainly seemed to accelerate its drop.
According to Stephen Innes, the head of Asian trading for the foreign exchange Oanda, hacks were the first element to have a chilling effect on crypto. Hearing the amount of money that thieves were able to take, he says, “Consumers got very concerned that their money could go missing.”
In the wake of both Coincheck’s hack–as well as a big one that hit the South Korean exchange Coinrail–governments in East Asia began to crack down.
Over the course of a few months, China, Japan, and South Korea all announced different measures to better regulate crypto-trading.
The world was watching to see if this new technology would hit the mainstream–and government crackdowns following gigantic hacks helped poison the public perception.
Indeed, following its nearly $20,000 peak, bitcoin in early 2018 dropped to around $10,000 and hovered there for a while.
Lack of institutional support
Beyond the clampdown by some governments, what bitcoin really needed to achieve sustained success was overall mainstream acceptance. While some financial institutions announced projects exploring blockchain-based solutions, many others balked.
JPMorgan CEO Jamie Dimon, for instance, made multiple comments throughout the year expressing his general antipathy for cryptocurrency. Dimon’s thoughts could most easily be summed with this quote: “I don’t really give a shit about bitcoin.” Warren Buffett also didn’t have kind words–calling it “probably rat poison squared”–which almost certainly sent a clear message to curious investors.
When some of the most respected people on Wall Street make comments that, it “takes a huge element of mainstream the market,” says Innes. Essentially, these heavy hitters were telling their minions that bitcoin wasn’t worth their time.
Meanwhile, there has been plenty of speculation that bitcoin’s big rise may have been due to a pump-and-dump scheme. One theory that the U.S. Justice Department is reportedly looking into is that the digital coin Tether (which is supposedly pegged to the U.S.
dollar to make for a less volatile cryptocurrency) was used to manipulate the bitcoin market and cause a large run-up in price. This theory stems from an academic paper, which cast Tether in a very damning light.
And it also led many to believe that the initial bitcoin craze was manufactured and destined to bust.
Another institutional hit for bitcoin–which probably had the most sustained effect–was the SEC’s refusal to approve a bitcoin exchange-traded fund (ETF).
This would be a path for more mainstream people in finance to dabble with blockchain; it would allow investors to dip their toes in bitcoin without owning the actual asset. Not only that, but it would make bitcoin available on the most prominent financial markets. The U.S.
Securities and Exchange Commission (SEC), however, has yet to allow such a fund to exist–mostly because it is unable to monitor crypto-transactions in order to avoid market manipulation.
The inability to get SEC approval really held back bitcoin and cryptocurrencies in general. It sent the message, says Innes, “that there wasn’t underlying support from Wall Street.” Meanwhile, the price dropped from around $10,000 to $6,000.
But it wasn’t just outside pessimism that led to the slump, but infighting as well. Blockchains are decentralized, and democratic systems require buy-in from participants in order to keep the engines running. When there’s a schism that can’t be decided by the majority, all hell breaks loose.
In 2016, this became apparent with the DAO hack. One way to fix the problem was to implement what’s known as a “hard fork,” which would essentially update the Ethereum-based software to fix the technical gaffe that caused the hack to begin with.
But DAO users had to agree to this change, and there were dissenters. Though the hard fork was approved, it created two active blockchains with two different sets of rules.
Ultimately, this hack–coupled with the inability to deal with it–caused the DAO to end in 2016.
This year we saw a similar fight break out–this time over bitcoin cash. This coin, mind you, is not bitcoin, though it is built on the same architecture.
It was created by a group of miners who disagreed with some of the fundamentals of the initial bitcoin system, and so they forked a new blockchain and went their own way.
In terms of market capitalization, bitcoin cash has always been one of the top cryptocurrencies–in the ranks of Ethereum and XRP.
This past autumn, the bitcoin cash community–which was created due to a technical disagreement with the larger bitcoin sector–started a civil war.
Essentially, bitcoin cash developers had diverging views on the software update for the system, and so they decided to implement another hard fork. This created two new bitcoin cash sects.
Internally, the fork caused a lot of strife; one of the most popular bitcoin alternatives was unable to reach a consensus, and instead had to create two different paths that would essentially go to war with each other.
When the hard fork arrived–and participants had to choose which path to take–the entire cryptocurrency market dropped. This is very ly what caused bitcoin to drop from the $6,000 range to around the $3,000-$4,000 range. Which brings us to today, with the cryptocurrency bottoming out at less than 80% of what it was a year ago.
Is there any hope?
We’re certainly in a much different place now than we were 12 months ago. What was a hot commodity has turned into a hot potato nobody wants to touch. Still, this almost certainly won’t be the end for bitcoin, or cryptocurrencies as a whole. Despite the realization that it was a bubble, even the toughest critics see some sort of a future.
Dow, the man who first shorted bitcoin, for instance, even mentioned in his initial post that a person can be “simultaneously bullish on blockchain and bearish on bitcoin.” And he just announced that he’s ending his short.
Meanwhile, even the most enthusiastic bitcoin evangelists are realizing that a retooling is in order. Michael J. Casey, a senior adviser for blockchain research at MIT’s Digital Currency Initiative, recently wrote about how the crypto-winter has arrived, but it may lead to better things down the line:
The good news is that the glare of public opinion will eventually dissipate, and that as the spotlight diminishes, real developers will find themselves in a healthier environment within which to do the work needed to unlock this technology’s potential. We saw a similar period of constructive building during the 2014-2016 hiatus.
But whatever new products are produced, they will now have a harder time struggling with acceptance. Whether we it or not, message and image are important.
That seems to be the overall message from most. Even Innes, who has been critical of bitcoin and crypto-trading for quite a while, admits that this doesn’t mean the blockchain is bunk.
He, in fact, sees things looking up. “If this base can hold,” he says, “[the price will] start drifting up.
” But not because of fervor or blind faith that bitcoin is the future, but due to advances on the technology side.
“This is a legitimate technology–it’s going to expand,” he says, “My longer-term view is nowhere near where some of [my current] views are.” It could even perhaps hit $10,000 again, he says. But that will probably take a few years. For now, we wait and see.
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Stay safe while trading cryptocurrencies
many new technologies, the price of cryptocurrencies is highly volatile at present. Investors can win, or lose, a large amount of money in a short amount of time, simply because of changes in the value of currencies Ripple, Ethereum and bitcoin.
As well as market volatility, there are other dangers for crypto investors – but many can be avoided with a bit of common sense. Good online security, background research and a healthy dose of scepticism will help make sure your cryptocurrency investment is as safe as possible, and that you don’t fall prey to any of the fraudsters taking advantage of the current boom.
1 Don’t put all your eggs in one crypto basket
Whether you’re investing in stocks and shares, gold or Ethereum, diversification should always be the name of the game.
Crypto investors betting on the next big thing should be mindful that not all currencies make it, so it is sensible to have fingers in several pies. In addition to this, ensure that cryptocurrency investments aren’t the only place you stash your cash.
As part of a diversified portfolio of different assets, digital currencies can be a viable part of a financial strategy.
2 Keep your computer and your data safe
As many cryptocurrency investors know to their cost, your cryptocurrency investments can be vulnerable to hackers. Keep your anti-virus software up-to-date and ensure you aren’t giving out your data online if you are storing or investing in cryptocurrencies. It’s all too easy for your precious investment to be stolen otherwise.
Lockdown: learn the many ways to keep yourself safe onlineCredit:Getty
If you’re storing cryptocurrency, ensure you have a number of wallets to store it in, and keep the wallets offline if possible. A simple physical device such as a USB drive can be helpful here.
3 Do your research before investing in ICOs
ICOs, or Initial Coin Offerings, have become a popular way for cryptocurrencies to raise funds from the public.
However, they have also become an easy way to prey on the vulnerable, and the financial regulator recently warned customers about what it calls “these very high risk, speculative investments”.
It warns that there’s little consumer protection and high potential for fraud, as well as high volatility. Some ICOs are regulated by the FCA, but this is on a case-by-case basis, depending on how they are structured.
Ensure you understand the leverage of your investments and whether you could end up losing more than you invested
As the FCA says, you should fully research any ICO before handing over your money. “You should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself,” a spokesman says. Alternatively, consider investing or trading with a regulated provider.
4 Become immune to FOMO
When it comes to the cryptocurrency boom, FOMO (fear of missing out) is one of the biggest dangers. But just because your neighbour or friend made money on a certain cryptocurrency doesn’t mean you will.
Often the point at which everyone is talking about a certain investment is the point when it is too late to jump in.
FOMO is no substitute for proper research, sensible assessment of loss potential and an understanding of what you are investing in.
5 Understand leverage
If you are investing in cryptocurrencies through a contract for difference (CFD) or spread bet (FSB) both your losses and your gains could be magnified by leverage. Ensure you understand the leverage of your investments and whether you could end up losing more than you invested in the first place. Be sure to trade with a firm offering CFDs that is regulated by the FCA.
Digital money decoded
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Cryptocurrencies and ICOs
Cryptocurrencies and initial coin offerings (ICOs) have emerged over the last 10 years as investments. You could lose a lot of money if you invest without doing your research first.
How cryptocurrencies work
Cryptocurrencies, also known as virtual currencies or digital currencies, are a form of electronic money. They do not physically exist as coins or notes. A cryptocurrency unit, such as a bitcoin or ether, is a digital token. These digital tokens are created from code using an encrypted string of data blocks, known as a blockchain.
The Reserve Bank of Australia's website explains how cryptocurrency and blockchain technology works.
Cryptocurrencies are used as payment systems to execute contracts and run programs. Anyone can create a digital currency, so at any given time there can be thousands of cryptocurrencies in circulation.
Types of cryptocurrencies
Each cryptocurrency has different capabilities. Most were not created to be investments.
Bitcoin is a digital currency. Users in the Bitcoin network (bitcoin miners) use computer-intensive software to validate transactions that pass through the network. They earn new bitcoins in the process. Bitcoin is a decentralised global payment system, but it's bought and sold in large volumes as a speculative investment.
Ethereum uses blockchain technology to run an open source platform. It can process transactions, contracts and run other programs.
This allows developers to create and run any program, in any programming language, on a single decentralised platform.
In the Ethereum blockchain, miners work to earn 'ether', which is a crypto token. Ether can pay for fees and services within the network.
Litecoin is an electronic payment system. Litecoin transactions process faster than Bitcoin. There are also more Litecoins in circulation than there are Bitcoins. Some users see Litecoin as a 'lighter' version of, or backup for, Bitcoin.
Ripple is a transaction protocol designed to complement Bitcoin. It allows real-time transfers between users in any currency, including other cryptocurrencies.
Ripple is a database in which users can store and transfer value in any currency on a protected network. Ripple uses tokens developers create, rather than mined or earned other digital currencies.
Some users don't see Ripple as a true cryptocurrency, but the technology has been popular with financial institutions.
Stablecoin is a marketing term for a crypto-asset that is 'supposedly' less volatile than standard cryptocurrency. Stablecoin tries to stabilise its market value by:
- attaching it to an external asset, such as government-issued currency
- maintaining a reserve of the backing asset
- using algorithms to control the supply of available tokens
You can buy or sell cryptocurrencies on an exchange platform using traditional money. The cryptocurrencies are kept in a digital wallet and some stores accept cryptocurrencies are payment for goods and services. But, they are not legal tender and not widely accepted.
You can withdraw some popular digital currencies Bitcoin as cash through special ATMs. Cryptocurrency networks generally have no or low transaction fees.
How initial coin offerings (ICOs) work
An ICO is a way a project can raise money over the internet. You invest in an ICO by sending money or cryptocurrency to a blockchain project. In return you receive digital tokens related to that project.
ICOs are speculative, high-risk investments. Many ICOs are for projects that:
- are experimental
- are at a very early stage of development
- may not have even started yet
Some projects may take years before they become commercially viable, if at all. A large number of ICOs fail or do not increase in value.
ICOs sound similar to initial public offerings (IPOs). But ICOs usually don't offer any legal rights and protections. Investing in an IPO means you are investing in an established company or asset, rather than a project.
While ICOs use the internet to raise money they are not the same as crowd-sourced funding. Crowd-sourced funding offers basic investor protections under Australian law.
ICO white papers
There will usually be a 'white paper' that contains information about the ICO and the project it's funding. The white paper should provide:
- the names and contact details of the people behind the scheme
- information on what they are planning to do with your money
The information in the white paper isn't always accurate. Sometimes the information can be unbalanced or misleading. The white paper may overestimate how profitable the project will be to convince you to invest.
If the white paper claims the ICO is not a financial product, they may be trying to avoid regulation. If the promoter avoids regulation, you may have no consumer protection.
The white papers can be very technical. This can make it difficult to understand what your rights and obligations will be after you've bought the ICO tokens.
The risks of investing in cryptocurrencies and ICOs
You could lose a lot of money if you buy into an ICO or cryptocurrency without doing your research first.
The platforms where you buy and sell cryptocurrencies and ICOs are not regulated. You're not protected if the platform fails or is hacked.
ICOs are highly speculative investments and many have turned out to be scams. It's even harder to get your money back if it turns out to be a scam and the ICO is from an overseas entity.
Cryptocurrency failures in the past have lost investors significant amounts of real money. In most countries cryptocurrencies are not recognised as legal tender. You're only protected to the extent that they fit within existing laws, such as tax laws.
Investing in virtual currencies and ICOs is highly speculative. Values can fluctuate significantly over short periods of time.
The value of cryptocurrencies and ICOs depends on:
- its popularity at a given time (which can depend on factors the number of people using it)
- how easy it is to trade or use it
- the perceived value of the currency
- its underlying blockchain technology
Scammers can use social media and messaging apps to push up the price of ICO tokens. They sell the tokens to other buyers at falsely inflated prices. This is known as a 'pump and dump' scheme.
Your money could be stolen
A computer hacker can steal the contents of your digital wallet.
Your digital wallet has a public key and a private key, a password or a PIN. However, digital currency systems allow users to remain relatively anonymous and there is no central data bank. If hackers steal your digital currency or ICO tokens, you have little hope of getting it back.
You also have no protection against unauthorised or incorrect debits from your digital wallet.
Scammers trick people into investing in fake opportunities to buy cryptocurrency. Watch out for these tactics:
- false promises of very high returns
- fake support from celebrities or government agencies
- people who contact you through social media
- using dating apps to establish a romantic connection and gain trust
- multiple or constantly changing bank accounts used for transfers
It can be difficult for regulators to make sure proper investor protections are in place because ICOs are:
- sold internationally
- available online
- usually paid for with cryptocurrencies
It's often unclear where the entity's incorporated and what laws and regulations apply to it. See ASIC's media release on misleading ICO statements.
Some issuers disappear as soon as they've finished fundraising, which may indicate that it is actually a scam. When this happens, investors have very little or no chance of getting their money back.
Rhett is scammed $97,000 by a fake endorsement
Rhett saw an article on a news website about ‘The biggest deal in Shark Tank history, that can make YOU rich in just 7 days! (Seriously)’
The news article was really an advertisement. It took Rhett to a website that included endorsements from Shark Tank judges for Bitcoin trading software. The endorsements were fake.
Rhett was interested in trading Bitcoin, so he provided his contact details. Soon, an Account Manager named Max began calling Rhett. Max called often, pressuring Rhett to open a trading account and make a deposit. By depositing between $40,000 and $50,000 upfront, Max promised Rhett he could earn at least $15,000 per month.
Max promised Rhett that the money he deposited would be safe because he would have total control of the account. “It’s more or less moving your money in your left pocket from your right pocket,” Max said. Max promised Rhett that he could withdraw his money whenever he wanted to.
Max eventually convinced Rhett to open an account and deposit $40,000. Rhett started trading Bitcoin, but things didn’t go to plan. Rhett started losing money. Max encouraged Rhett to deposit more money so they could fix the situation. Max promised that in a week Rhett able to withdraw the money that he needed.
Rhett deposited more money in the hope he could recoup his losses. Rhett ended up depositing and losing a total of $97,000.