Cryptocurrencies have been gaining traction as a result of the ever increasing popularity of the instrument. The explosive growth in use of cryptocurrencies, especially Bitcoin and Ethereum, and ICOs has recently lead to very high current and future expected valuations, leading financial markets participants to assume a bubble is forming. The speculative nature of ICOs and crypto trading on the still imperfect infrastructure has also created a thriving environment for cyber crime attacks, robberies, money laundering and other controversial offensive activities.
In light of the growing threats of a financial bubble, China banned ICOs and crypto trading, which naturally resulted in an immediate drop in the values of the 15 largest cryptocurrencies. Nevertheless, despite the volatility, the Chinese ban can be assessed as a positive development in the cryptomarket. Cryptovalues will recover as practitioners digest the information and adjust their long term forecasts, including the new regulatory framework, which will eliminate fraudulent participants and enable stable future development of the market.
China “Pops the Bubble”
The major event that shook markets this week was China’s ban of ICOs, the trend underpinning the hype and inflating the cryptocurrency bubble. According to the People’s Bank of China, virtual currencies that are “not issued by the monetary authorities… do not have legal status equivalent to money, and can not and should not be circulated as a currency in the market use.” The PBC and 6 other regulatory agencies released a statement banning the trading and use of all cryptocurrencies in China. Predictably, the event caused immediate decline in the value of the 15 largest cryptocurrencies by market cap.
ICOs have seen exponential growth, with $1.8bn raised in 2017. They are a highly speculative activity enabling firms to raise large amounts of money within minutes without providing an actual product. In addition to leading to financial market bubbles, the activity also entails serious cyber security and crime threats.
Rising Cyber Crime
ICOs phishing, which involves use of fake websites or social media accounts that resemble the real ICO, is the most successful cyber crime activity, reaching almost the same amount of losses from actual theft. For example, the losses from cyber theft are almost equal to the losses from actual robberies in the US, worth $390m in 2015. Other types of cyber crime involve tapping project loopholes, that once exploited can lead to wealth theft. Both types of threats from cyber crime imply that the ICO infrastructure needs to be fortified in order to prevent abusive behaviour.
A recent analysis by Chainanalysis, a New York company that analyzes transactions and provides anti-money laundering software, uncovered that Ethereum bandits stole $225m in 2017 alone. The theft affected 30,000 ICO investors, who lost $7,500 each, on average. The investors willing to obtain early entry to new token offerings were tricked to provide their credentials and send money to fake internet addresses, allegedly funding sites for token offerings related to the Ethereum blockchain technology.
Meanwhile in Australia, concerns have been expressed about the threat of criminal activities related to cryptocurrencies and online banking services. According to a report released recently by the Australian Criminal Intelligence Commission, Australia is losing $28.3bn annually from money laundering. Australian authorities are concerned that e-commerce businesses and Bitcoin exchanges facilitate criminal activities, due to the lack of transparent transactions and encryption. Controversially, a connection between cryptocurrencies and human trafficking has also been established.
Despite the real threats from cyber crime, chances are that cryptocurrencies will continue soaring in the future, as regulation, the ICO infrastructure and criminal behavior elimination become more developed. The recent Chinese ban is a proof of concept, as according to some experts, the new regulation will eliminate the offensive speculators and leave only the founders with trustworthy products, sensible and well structured token sale process, and international outlook. South Korea has also pledged to “strengthen levels of punishment” for those looking to raise money through ICOs, while the US already in July ruled that ICOs must adhere to strict securities laws.
Moreover, most experts and practitioners are optimistic and positive about the technology, while traders and investors believe its value could reach astronomic heights. Based on a recent prediction by a trader famous for accurately predicting its value, Bitcoin could be worth $15,000 by the end of 2017, while it will increase and stabilize between $40,000 and $110,000 by 2019.
According to top cryptocurrency entrepreneurs, venture capitalists and bankers, gathered during a Fortune Brainstorm Tech conference in Aspen, Colorado, earlier in July, the future of cryptocurrencies, most notable among which are Bitcoin and Ethereum, is bright. Most people who are bullish on cryptocurrency believe that Bitcoin and Ethereum will exist in the next 5-10 years.
The experts believe that there will be newcomers in the cryptocurrency market, as niche blockchain products, such as Tezos, are developed to solve problems. It can be expected that there will be one or two new dominant coins in the market within this or next year. While they believe that ICOs could lead to frauds, market manipulation and insider dealing, which is already well recorded, they also think that regulation will improve and expect transparency during the process of developing the regulatory frameworks. Experts believe that cryptocurrencies will become more stable and reduce speculation and will increase competitiveness, as incumbents improve their services.
As with most cases in financial markets irrational episodes, a bubble is only sustainable as long as the herd behind it supports its behaviour and fundamentals do not pose threats. The assumed bubble in cryptocurrencies could pop due to speculation or real threats such as cyber security and crime attacks and other criminal activities. However, considering the rapid tightening of regulation and awareness of the prospects for criminal activity, which will inevitably lead to stronger ICO infrastructure and protection, cryptocurrencies are well set to become an integral part of the digital economy, which will eventually support their high valuations.