Making Sense of the Stubborn Crypto Bear Market

All across the internet, millions of voices suddenly cried out in terror, and then checked their bitcoin wallets. Despite a period of gains, Bitcoin has been heading steadily south, and it took another hit recently, bringing its month-long decline to 30 percent at time of writing. Other altcoins plummeted as well, although Ethereum has shown signs of life as investors go bargain hunting.

Many experts thought bitcoin was poised to enter a second bull market, but instead we find it refusing to leave its lair. Let’s have a look at some of the factors behind this ursine stubbornness.

Regulation Looms

Initial Coin Offerings (ICOs) are currently withering under the the existential microscope of the SEC in the United States. At the heart of the issue is a debate over exactly what these coins are. Developers, users, and crypto enthusiasts are quick to distinguish “utility token” ICOs – cryptocoins that can be used for whatever service a company is providing, ala Ether on the Ethereum network – from “security tokens” – coins that act like financial instruments. But government regulators don’t seem to be making the same distinction.

While a true hammer-blow has yet to fall, the SEC has already forced cryptocurrency exchanges to register with the agency, a move blamed by many for Bitcoin’s initial tumble in March 2018The SEC’s concern with rampant fraud in the ICO world is certainly justified, let’s just hope they don’t throw the baby out with the bathwater.

Vulnerable Exchanges

Cryptocurrencies can be the safest currency on earth as long as you store your coins securely, but the reality is that many crypto owners find the most secure methods either technologically intimidating or simply too much of a hassle, and instead choose to store their coins on an online exchange. This is the equivalent of trusting a bank with your assets, and just like banks, the level of security can vary wildly, especially in countries that may not do as much to prevent hackers.

The latest chapter in this story unfolded with the recent hack of South Korea’s Conrail exchange. According to the exchange, thieves absconded with 30 percent of its currency, and while Conrail didn’t state the value of assets lost, the resulting drop in Bitcoin’s value reveals that the community’s perception of security is much more powerful than raw dollar amounts.

Hacks like the one on Conrail add to the overall concern of cryptocurrency’s volatility. Unless the market settles down, major investors (to stay nothing of hedge funds) are going to stay as far away as possible, not wanting to risk large sums of money in a chaotic venture.

Scalability and Sustainability

Blockchain, giant leap forward though it may be, still has some kinks to work out. Vitalik Buterin, the founder of Ethereum and one of blockchain’s greatest evangelists, admitted as much in early 2018. The key to blockchain’s power may also be its Achilles heel. Because every node must process a transaction, the blockchain is incredibly secure. If a hacker changes one entry in the ledger, there are thousands, millions, even billions of ‘true records’ that can be used to roll back any acts of mischief. But this distributed record keeping limits the blockchain to the power of the nodes themselves. If, like Visa, a blockchain needs to process 24,000 transactions a second, some of the nodes in the system might not have the capacity to handle the workload. While Buterin has proposed several strategies to correct this problem of scalability, it remains a concern.

Another potential setback is the sustainability of coin mining. Already a quantity of energy close to the Republic of Ireland’s energy footprint is being used in various mining operations throughout the world. Can communities really crank out enough wattage to keep this going, let alone stay ahead of demand? If bitcoin becomes as ubiquitous as a fiat currency, generating new coins will be an incredible resource drain. This only applies to Proof of Work (PoW) currencies, not Proof of Stake (PoS), where every coin is created at the inception of the currency without any mining involved; the problem is that most of the major players are PoW.

Does mean you should cash out your chips and banish cryptocurrency to the island of forgotten tech fads? Absolutely not. There are many mountains left to claim before crypto and the blockchain are as commonplace as credit cards and the internet, but that time will come sooner than the skeptics would have you believe.

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Will Minor
Will is a writer-at-large for Block Telegraph. A prolific writer and futurist from New York City, he specializes in all things cutting edge. He holds a Masters in the Arts and has taught extensively abroad.

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