Most crypto enthusiasts believe that cryptocurrencies are magical investments and the bull ride will continue to scale new heights in the future. However, if we look at it realistically and rationally, a few factors which could trigger the much debated impending crash.
Note: Crash is a very subjective term. I do not believe any of the factors mentioned below can cause cryptocurrencies to go to zero. Depending on the magnitude of which the factors mentioned below occur, markets could crash between 10 to 75 percent.
Most crypto advocates completely disregard the implementation of government-backed cryptocurrency ban by putting forward the argument that the inherently decentralized nature makes them immune to ban. However, while governments can’t ban cryptocurrencies, they can definitely shake up the system by banning exchanges.
If we revisit the history of crypto crashes, we can learn that the crypto market crashed by almost 33% after the Chinese government announced a crackdown on exchanges and ICOs by enforcing a ban.
While the market did recover soon and scale new heights after the crash, it would be unwise to rule out the probability of another crash if regulators in other countries decide to end the party.
In fact, one of the reasons for the present bearish trend is the FUD that has been created because of regulatory rumours in different countries like South Korea, India etc. The cryptocurrency market capitalization crashed by almost 40 to 50 percent amidst rumours of regulation.
If the rumours do actually to turn out to true and regulation is initiated, then it can spell doomsday for cryptocurrencies.
Back in 2014, Mt. Gox boasted over 70% volume of all bitcoin trading activity. In the beginning of that year, 740,000 bitcoins worth 460 billion dollars were hacked and Mt. Gox suspended all trading activity. Eventually, they exchange filed for bankruptcy.
Interestingly, the stolen bitcoins are worth 8 billion dollars at current bitcoin rate and were worth around 15 billion dollars at bitcoin ATHs.
After the exchange hacking news broke out, bitcoins plummeted from around 1000 dollars to 500 dollars. The hack had such an adverse effect on scaring investors that bitcoin even fell to $250 by 2015 and failed to recover until the year-end.
To be fair, times have changed now. Exchanges have revved up security and trading volumes are also well distributed among different leading exchanges. To put the distribution into picture, hardly any exchange owns more than 10 percent of the trading volume according to coinmarketcap
To sum it up, a high-scale exchange hack could cause the cryptocurrency market to crash by 10 to 20 % if not significantly.
Failure to keep up with expectations
Backed by irrational exuberance, cryptocurrencies witnessed a stellar run last year. However, what’s worrisome is that most of these coins are overvalued if valued in terms of usability and acceptability.
Using bitcoin to buy coffee is still a struggle. You can’t expect the average person to wait for 45 minutes and pay more than the price of the coffee itself to facilitate the transaction. Coins like bitcoin, Ethereum and Litecoin are all facing scalability issues.
Unlike Listed companies, which have profits, balance sheets, net income statements, audits and cash flows, cryptocurrencies do not possess any of these features making it difficult to infer what is the true value of a coin. Currently, the price of these coins is determined by speculation.
When the crypto mania subsides and coins are judged on the basis of utility, it could push them towards a downtrend.