Nick Chong · 1 week ago · 2 min read · Insights via Grayscale Investments
According to prominent venture capital investor Chris Burniske, the crypto market fell by nearly 80 percent in 2018 due to the lack of adoption of major digital assets.
Throughout 2017, Bitcoin, Ripple, Ethereum, Bitcoin Cash and the majority of cryptocurrencies experienced a rapid increase in their valuation, recording 1,000 to 30,000 percent gains within a 12-month period.
Yet, in the past eight months, the valuation of the cryptocurrency market fell from $900 billion to $195 billion, more than 78 percent.
Crypto Price Surge Wasn’t Proportional to Adoption
The value of cryptocurrency, similar to fiat money and reserve currencies, solely depends on its ability to operate as a robust and efficient medium of exchange. Cryptocurrencies like Bitcoin and Ether, the native currency of the Ethereum blockchain protocol, are valuable because investors can trade them for alternative assets and currencies, in markets with high liquidity and user activity.
Despite having seen 100-fold gains in 2017, major cryptocurrencies have failed to demonstrate significant progress in adoption and scaling.
Burniske, a partner at Placeholder VC, emphasized that the adoption of cryptocurrencies as a payment method and a medium of exchange should have increased proportionally to their market valuation, and the exponential increase in the value of digital assets has caused a negative impact on the mid-term trend of the market.
Burniske said in a series of tweets:
“Why is crypto falling so much in 2018? Because in 2017 the market was up > 30x, but adoption (beyond investing & trading) wasn’t concurrently up 30x. One can try to explain each fluctuation, but these explanations are frequently stories we tell ourselves, stretching to add reason to traders driving a bear market.”
In November 2017, as the price of Ether increased by 30-fold since January 2017, Ethereum co-creator Vitalik Buterin encouraged the community to re-evaluate the valuation of the market after considering the real adoption rate of cryptocurrencies, blockchain technology, decentralized applications (dApps), and financial networks.
At the time, the valuation of the cryptocurrency market was $500 billion and within 10 months, the valuation then surged to $900 billion and ultimately dropped below the $200 billion mark.
Cryptocurrency is a consensus currency, a payment method, and a decentralized network designed to facilitate transactions. Thus, as Adobe product lead and Dogecoin founder Jackson Palmer said there exists no better metric than daily transaction volume to measure cryptocurrency adoption rate.
Ripple (sorry, XRP) is processing less payments per day than it was in 2016. pic.twitter.com/qLeihMUtiD
— Jackson Palmer (@ummjackson) August 8, 2018
Since 2017, transaction volume of Bitcoin, Ethereum, Ripple, and Bitcoin Cash has declined, with Ripple’s daily volume reaching below 2016 levels.
Given the lack of adoption of cryptocurrencies as alternative payment methods, Burniske stated that to understand the current trend of the market, investors must compare the price of cryptocurrencies in 2018 to that of 2017, and analyze the difference in adoption in the two periods. Burniske added,
“How far we will fall depends on how much adoption grew in 2017 — 3x? 5x? 10x? Right now the market’s sitting at ~10x above January 2017 prices (more/less in some cases), but has adoption grown 10x since then? 2017 is not the first time, nor is it the last time this will happen to crypto. We have entered the frenzy, where financial reality will often hyperventilate, as the underlying fundamentals march onwards mostly unperturbed.”
Where Does the Market Go Next?
Already, multi-billion dollar conglomerates like Microsoft, Starbucks, and the New York Stock Exchange are working to improve the usability of cryptocurrencies. Companies such as Pundi X have sold tens of thousands of cryptocurrency-enabled point-of-sale (PoS) machines to merchants, restaurants, cafes, and hotels, to bolster the adoption of digital assets.
Historically, the cryptocurrency market has consistently ensured patterns of bubble-crash-build-rally, and as companies focus on building the robust infrastructure to support the next resurgence, more users will accordingly be more attracted to the cryptocurrency market.