Everything You Need to Know About What’s Next for the Year in Crypto

(Bloomberg) -- In 2017, Bitcoin led a motley pack of cryptocurrencies in one of the great booms in market history, soaring 1,400 percent. In 2018, it’s led an epic bust that rivals the dot-com era stock market collapse. As the dust settles, investors and regulators find themselves still grappling with questions first raised when Bitcoin broke into public consciousness five years ago, including: What exactly is it? And where do cryptocurrencies fit into the future of money?

1. Why are so many people down on Bitcoin?

You mean, why did legendary investor Warren Buffett call it "rat poison squared”? There’s a long list of reasons. Besides the massive price swings, Bitcoin and other cryptocurrencies have been connected with scams, money laundering, tax evasion, cyberthefts, excessive speculation and more. Risks like these may have been easier for regulators to overlook when Bitcoin and its peers sat on the far fringes of finance, but they are moving ever closer to the mainstream. The stakes got much higher when mom-and-pop investors piled in. Lenders including JPMorgan, Bank of America and Citigroup have barred customers from using their credit cards to buy cryptocurrencies to avoid the risk associated with these transactions.

2. Why has 2018 been so rough?

With regulators beginning to crack down, and fear of big losses displacing fear of missing out, Bitcoin has fallen more than 75 percent from its peak, and the worth of hundreds of other virtual coins tumbled to close to zero. (Bitcoin’s largest rival, Ethereum, soared to $1,100 at the start of 2018 but dropped to near $130 this week.) In October, economist Nouriel Roubini, famous for foreseeing the 2008 financial crisis, told U.S. lawmakers that virtual currencies are “the mother of all scams and (now busted) bubbles.” The problem with crypto is that what starts as a flurry can turn into a blizzard. When prices tumble, miners sell coins to cover costs, institutions become less keen to enter and regulators find their skepticism vindicated.

3. How are regulators clamping down?

Their approaches have run the gamut, from an exchange-licensing regime in Japan to a largely hands-off system in Switzerland. But the anonymous and borderless nature of many digital coins makes them tough to control. China, once the world’s most active Bitcoin market, banned crypto-asset exchanges in 2017 and blocked access to overseas trading platforms. The crackdown came during government campaigns to stop money from leaving the country and to reduce financial risk. Most countries, notably the U.S., have not yet formulated a comprehensive regulatory strategy. But U.S. prosecutors are investigating whether traders have been manipulating the price of digital currencies. One threshold question for regulators is what, fundamentally, Bitcoin and its ilk are: currencies, commodities, securities or something entirely new.

4. So, what are they?

Born out of the bitterness that followed the 2008 financial crisis, Bitcoin and its imitators aren’t bills or coins printed or policed by a government or bank. They’re electronic assets created and monitored by a community of users acting in a decentralized way. The vision behind Bitcoin laid out in a 2008 pseudonymous manifesto promised that no more than 21 million will ever be created. That means it’s sometimes compared with scarce commodities such as gold, whose value is determined solely by what people are willing to pay for it. But some crypto-assets have characteristics of stocks, such as shared ownership in a common endeavor and initial offerings of shares to the public. In the U.S., the Securities and Exchange Commission opened a broad probe into whether entities running so-called initial coin offerings are violating rules by offering what are really securities. China has banned ICOs entirely.

5. Who are the crypto true believers?

Here’s a short list of enthusiasts: Hackers drawn by a disdain for authority and the libertarian aspirations behind Bitcoin’s creation. Technology geeks who believe they’re disrupting the marketplace and getting in early on the next chapter in the history of money. Novice investors and speculators drawn by the promise of soaring gains. Financial firms and central banks that think something important will come out of all this even if Bitcoin withers. And there are also plenty of investors who aren’t true believers but who hope to find one to sell their holdings to if crypto prices soar again.

The Reference Shelf

• QuickTake explainers on crypto regulation and Bitcoin’s wild price ride in late 2017.
• A chart of how Bitcoin stacks up to other asset bubbles.
• The original whitepaper outlining Bitcoin’s protocols.
• A Forbes article discussing the future of Bitcoin as a currency, as something used to buy Big Macs and other stuff.

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net, Laurence Arnold

©2018 Bloomberg L.P.