Consolidation or Bubble? What is the fate of the cryptocurrency market in 2017?

The strong gains and negotiations during the first half of 2017 on an incredible volatility of crypto-coins raised a lot of questions on how digital currencies will behave during the second half of the year. Bitcoin reached a record high of $ 3,000 on June 11 and fell 27% in the following days. It ended the first half of the year with a price of US $ 2,436.70, after more than doubling its price in the previous three months.

The meteoric rise of Bitcoin is said to be largely due to rising demand in Asia. In early April, large retailers started to accept Bitcoin as a form of payment in the country as new rules came into effect in Japan.

Even so, Bitcoin is still under growing pressure since a divergence on how to better enhance the currency’s ability to scale, as transaction speeds and network congestion increased. The Bitcoin community has been largely divided and ambivalent regarding a solution. This may eventually lead to a separation. If a haphazard solution occurs amidst such a split community, Bitcoin could be broken into two distinct, competing currencies.

New proposals are still expected for this year to address this issue, which could result in changes in the processing capacity of the Bitcoin network. Most solutions involve what is called that is called a fork, and in the worst case scenario divide the currency into two separate blockchains. This is resulting in many community members raising concerns that a possible currency split can take effect and the demand for a new alternative such as Ethereum might take place.

Ethereum, which is still in a nascent development stage when comparing to Bitcoin, is a new currency that has been growing in popularity. This year it hit an all-time high of $ 419.30 on June 11th.

Currently, Ethereum is being traded for around $225. The market capitalization of Bitcoin is around US $ 41 billion, whereas Ethereum has a total market cap value of around US $ 26 billion.

There are some crucial differences between Bitcoin and Ethereum. Some fundamental differences include the blocktimes and block sizes, but the most important difference is related to the purpose of the respective coins.

Bitcoin was created as an alternative to coins; it’s pure and simple digital money. On the other hand, Ethereum developers aimed to establish a platform that facilitates peer-to-peer automated contracts or, as some refer to them, “smart contracts.”

Although both Bitcoin and Ethereum compete as cryptocoins in the short-term due to a largely speculative crypto trading culture, there is no projection, in fact, for them to be direct competitors.

In regards to Blockchain Technology

In recent years, interest in cryptocurrency has shifted to the technology behind it, the blockchain. Experts believe this is bound to spur a greater revolution in the financial world more so than digital currency itself. Banks, who once were leading the movement against Bitcoin are now expecting this technology to be the way to reduce the complexity and costs of activities such as the settlement of international negotiations and payments.

ICOs leading the expansion

In the second half of 2017, both Bitcoin and Ethereum prices were driven by initial coin offerings (ICOs) that have emerged as the favored fund-raising tool with which new developments within the industry are launched. An ICO is a cross between collective financing and initial public offering that sells digital tokens or “coins” created through blockchain technology in exchange for immediate value cryptocoins. The development of Ethereum was initially funded by an ICO. With speculators’ appetite for rapidly expanding blockchain, the price of Bitcoin and Ethereum will likely continue to rise as funds are raised for these currencies.

In addition to Bitcoin and Ethereum

Litecoin and Ripple were, respectively, the number two and three cryptocoins before the arrival of Ethereum. In recent years, Ripple has surpassed Litecoin in market capitalization, becoming the current number three currency after Bitcoin and Ethereum.

Like Bitcoin and Ethereum, Ripple and Litecoin have different purposes. Ripple is a payment protocol, a secure way to represent and transfer any value unit. It is used by banks, such as UBS (NASDAQ: UBSI) and Santander (NYSE: SAN), and cannot be mined, meaning that the creation of additional Ripple coins is centralized and can only be done by the owner of the protocol or one of its representatives with knowledge and access to the appropriate technology.

Litecoin, although similar to Bitcoin, is technically more advanced since transactions can be processed faster, reducing the types of bottlenecks commonly seen in the Bitcoin trading. On a day-to-day basis, however, the price volatility of the crypto-currencies will continue to be controlled by traders. One thing is certain: sudden 20% breaks or equally violent jumps in a matter of minutes are not a thing of the past in this sector.

According to recent data, there are over 800 different crypto coins available today, including coins with esoteric names like MarxCoin, PonziCoin, SelfieCoin, and PutinCoin, with more coins emerging all the time. That is why rumors of a bubble continue to spread. During the last few months, many of these currencies have appreciated exponentially, however, these last few days have seen corrections to these astonishing prices. In fact, the possibility of stratospheric profits is one of the explanations many believe to be bringing a new wave of interest in cryptocurrency.

ETFs and Mutual Funds Surging

With a potentially lucrative opportunity at stake, it is no surprise that fund managers and companies also want to enter the realm of virtual currencies. Grayscale’s Bitcoin Investment Trust (OTC: GBTC) is an ETF traded on a free market (outside established brokerage firms). The company describes the fund as the first “publicly traded title invested in deriving Bitcoin price value”. The ETF does not accurately reproduce Bitcoin performance since it is traded at a premium over the BTCUSD pair. The fund had extraordinary returns in May when it gained 248% compared to 72% of Bitcoin. Since the beginning of 2017, the ETF has risen 199%, while Bitcoin has risen by 129%.

Others are eager to enter the fray, not always with immediate success. In a ruling issued on March 10 of this year, the US Securities and Exchange Commission rejected a request by Tyler and Cameron Winklevoss to negotiate its Winklevoss Bitcoin ETF (COIN) at Bats BZX. At the same time, the SEC claimed to have denied the Winklevoss’ request because of the risk of fraud and lack of regulation of the world’s Bitcoin markets.

On March 24, Bats appealed against the decision by petitioning to review the rejection. A month later, the SEC agreed to consider Bats’ petition. Potential Bitcoin investors are waiting for the next round of deliberations on the issue and a possible overturn in the SEC’s original decision. Bitcoin prices soared with the review announcement. Still, according to CNBC, approval will not be easy. Last month, Crypto Fund AG of Zug, Switzerland, announced plans to launch the Cryptotomed Fund, a European mutual fund based on the Crypto-Molecule Index, which will invest in the top virtual currencies including Bitcoin, Ether, Ripple and other well-established crypto-coins. The fund should be launched sometime in the fourth quarter of 2017.

Fundamentals of the Cryptocurrency

Along with fund recognition, there are an additional number of key factors that can drive cryptocurrency prices up in the second half of the year. Official recognition by governments is one of them. By recognizing at least some of the virtual currencies as legitimate, this will increase their acceptance and consequently their demand. Japan recently came to consider Bitcoin as a legal form of payment, causing the currency to reach historic highs because of the announcement.

Recognition of funds and official sanctions of virtual currencies could capture more attention in conventional media. Today, even with the interest in crypto-coins growing, only a small minority of the population is aware of its existence and its inner workings – and still fewer participate in the negotiations. As opportunities to use crypto-coins in everyday life increase, so will their value.

Finally, Bitcoin, Ethereum and others can be seen as “disaster coverages” since they are unregulated and exist independently of federal governments and central banks that could prove invaluable in the event of war or major catastrophes. While volatility prevents them from being true safe havens, if the situation with North Korea, for example, gets out of control, we fully expect Bitcoin and similar currencies to skyrocket.

Some may argue that, without broad acceptance and reliable government oversight of the burgeoning world of virtual currencies, there is little to recommend due to the high volatility. It seems that the buzz and the headlines are the main motivators. In addition, using these coins as a safe haven status in the event of a disaster is a very small niche for a new financial product, let alone for a whole new class of assets.