The South Korea And Japan News Are Just Noise – Here's What's Really Behind This Month's Crypto-Collapse

Bitcoin (BTC-USD) the past week has collapsed to its lowest level as of far in 2018, amid a combination of another South Korea cryptocurrency exchange hack and potentially hostile action by Japanese financial regulators, long the regulatory safe harbor for cryptos.

Upon closer examination however, the recent news is actually noise in terms of any long-term drivers of cryptos yet still had the effect of sending the asset down over 10-15% in just a few days.

What’s Going On In Japan And South Korea For Cryptos?

Japan and South Korea, as where much of world cryptocurrency activity has been taking place, have also been the target of immense hacks in recent months. From the $500 million hack of Japanese exchange Coincheck in January to South Korea having this month faced a $40 million hack of Coinrail and $30 million hack of Bithumb, it seems even now exchange security remains tenuous at best.

Amid this, Bitcoin has sunk to currently a price of $6,199 per coin and a market capitalization of just $104.7 billion, down 5.98% this week on week and 18.57% month on month. At now its lowest level in 2018, BitCoin has not seen this price level since a brief correction back in November 2017.

(Source: CoinMarketCap)

Other cryptocurrencies have not fared much better, with BitCoin Cash (BCH-USD) down 11.13% this week and 27.03% this month, Ethereum (ETH-USD) down 5.84% this week and 19.68% this month, LiteCoin (LTC-USD) down 14.98% this week and 32.33% this month, amid others.

Perhaps the worst hit major cryptocurrency has been EOS (EOS-USD), which is down 22.35% week-on-week, followed by Cardano (ADA-USD) (-16.60%), IOTA (IOT-USD) (-16.58%), and Stellar (XLM-USD) (-14.01%).

As shown, this is less of a selloff in just BitCoin in particular but a widespread correction across cryptocurrencies in general. The overall cryptocurrency market capitalization has dropped to about $256 billion, down about 22.4% from $330 billion at the beginning of this month.

During this time, BitCoin’s market share has actually increased slightly, as some other alt-cryptos have pulled back (some more than others).

(Source: CoinMarketCap)

(Source: CoinMarketCap)

Much public speculation has pointed to recent events in South Korea and Japan as drivers for this recent downturn amid the seeming resurgence of cryptocurrencies in April, where we saw cryptos boom from $252 billion in market cap at the beginning of April to $469 billion by the beginning of May, for an increase of almost 86% and driven primarily by altcoins.

The theory is essentially that the consistent exchange hacks will push South Korea to slow its recent regulatory relief towards cryptocurrencies, such as potentially lifting an ICO ban, in contrast to its harsh approach otherwise in months prior.

Japan has long been known as among the most friendly major regulatory regimens for cryptos, with it having been the plurality of much of cryptocurrency inflows in the past year. Japan recently issued business improvement orders to six cryptocurrency exchanges, amid a move several weeks ago to ban certain privacy-oriented cryptocurrencies.

Though Japan has stated all these actions are meant to fight money laundering, some worry it could be a sign of changing times in Japan’s regulatory attitude towards cryptos.

What Is Really Going On?

Personally, I think the South Korean and Japanese developments are a lot of noise within themselves, as South Korea’s regulatory attitudes are complex and the hacks may not suddenly swing the regulatory relief completely. In Japan’s case, the regulatory “tightening” has not been that significant as of far besides the privacy ban, with business improvement orders potentially even beneficial to cryptos as the public better trusts exchange security.

Rather, I believe the market decline is due in part to the news reminding many of the decreasing level of interest in cryptocurrencies, and thus the decreasing market demand for a highly elastic demand-based asset. Indeed, from January of this year Google searches for Bitcoin have plummeted dramatically, about 75% YTD and over 90% from their high. Other various growth metrics, such as wallet interest, have shown similar sluggishness or declines.

(Source: CNBC)

I believe certain cryptocurrencies have a somewhat reasonable inherent valuation within themselves based on current and potential product market share. Nonetheless, their price at the moment remains overwhelmed largely by market demand because of both the sheer size of public whims overtaking valuation factors and the rapidly changing nature of cryptos technologically themselves, changing the markets the cryptos are part of.

In my opinion, until cryptocurrencies become stabilized, both in terms of regulation and the underlying technological fundamentals, cryptos such as BitCoin will continue to experience immense volatility and be primarily market-demand driven. Market demand for cryptos, as with regular fiat currencies, is driven primarily by general interest rather than a coherent asset valuation.

Conclusion

The South Korea and Japan news are noise, a correlation with cryptos’ recent price movement rather than a cause.

With general interest in cryptos on a momentary decline, and institutional pushes into cryptocurrency still developing, shaky, or even negative for current cryptos as institutions create their own cryptos, the current correction in BitCoin and other crypto prices is not too surprising.

The cryptos likely will face a floor soon enough as there remains still a large level of public and institutional demand, but once the sector stabilizes and becomes truly mainstream then asset-based crypto valuations likely will begin to become as much a factor as purely demand and currency-based market price action.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Joan Guzman