The bears had a field year in the cryptocurrency markets around the world in 2018. By December 2018 the valuation of the global cryptocurrency market capitalisation was around $135 billion compared to the same period in 2017 when it was at $500 billion. Leading cryptocurrencies like Bitcoin and others saw historical price drops.
In Nigeria where the market was judged to be the seventh largest in the world in terms of peer-to-peer transactions by LocalBitcoins, volumes sluggishly retreated - starting the year at N1.603 billion and ending at N1.110 billion.
Many factors are thought to be responsible for the market decline. The state and other regulatory authorities fear that cryptocurrencies like Bitcoin will overrun states' local monetary systems, which in turn resulted in clampdowns on exchanges, traders and miners. There were also instances of money laundering and an increase in cybercrime which put investors' funds at risk.
However, a not-so-mentioned cause is the prevalent lack of education in the market and a subsequent lack of understanding. The media often does not help matters with negative headlines driven by lack of research and sometimes mere rumours.
The cryptocurrency market is still in its infancy, which makes it unfair to compare with the more mature traditional financial market. It is an innovative technology with many sides that still needs to be fully understood. The existing financial system was built over centuries, and therefore has had hundreds of years to learn, fail and learn again.
For the cryptocurrency space, a year like 2018 would best be described as a steep learning curve. Researchers at Chainalysis noted that the Bitcoin market has matured throughout the past nine months. In a recent report, the researchers explained that the market seems to have calibrated after the entry of so many new market participants with different expectations than those who held Bitcoin prior to 2017. Neither long-term investors nor new speculators have changed their positions much.
One major point that could ensure a fundamental change is positive for every player in the market, including miners, exchanges, regulators and consumers is continued investment in education. It is encouraging to see that many exchanges are prioritising cryptocurrency education in 2019. The Luno Learning Portal, for example, has one of the richest compilation of learning materials in the market so far, establishing Luno as a leader in providing much needed market education.
Despite itself, the year 2018 brought in some form of stability and correction to the market. Many investors who only saw it as a space to make quick money exited when their crystal balls failed to show exaggerated price predictions, which is likely to continue being the case in 2019 and beyond.
From Luno's 2018 survey results, we can see the market maturing and we expect to see long-term investors with an understanding of the short-term risks coming in to take positions in the market. Of course, the short term participants won't go away, but their influence will most likely not be as dominating as it has been in the past.
The intensified activities of regulators in the market will also wane the influence of short term traders. A few days into 2019, the South African Reserve Bank (SARB) released a new consultation paper focusing on cryptoassets in the country. In summary, the paper recommends a stricter regulatory environment for crypto assets.
While this may pose its challenges for legitimate operators, it's a pointer to what lies ahead for the continent.
Almost everyone expects the Central Bank of Nigeria (CBN) to also release regulatory guidelines around cryptocurrencies and blockchain technology. The market is eagerly waiting for a robust framework from regulators.
The jury, however, is on the side of adopting already existing regulation. Irrespective of what the CBN comes up with, regulation is the right way to go for the cryptocurrency market. Exchanges like Luno already have industry best practices incorporated into their everyday operations and are positioned to adopt any regulatory guidelines that may come.
Regulation will help increase trust, weed out most - if not all - of the bad players, and form the foundation for large-scale institutional funding to come into the crypto ecosystem. In essence, regulation will give a clearly defined path to adoption which is necessary to grow the market.
Luno is a leading global cryptocurrency company on a mission to upgrade the world to a better financial system. With a team of over 250 and currently headquartered in London with regional hubs in Singapore and Cape Town.
Owenize Odia, Country Manager, Luno Nigeria.