In another volatile day, cryptocurrencies dropped rapidly on Tuesday, more than reversing Monday’s gains. In the last 24 hours, Bitcoin (CRYPTO:BTC) has fallen 3%, Ethereum (CRYPTO:ETH) is down 5%, and Dogecoin (CRYPTO:DOGE) has dropped 7.6%. Momentum also appears to be pushing these cryptocurrencies lower, so the fall may not be over yet.
As usual, regular volatility is likely the biggest driver with cryptocurrencies simply selling off as investors take profits. But there are some fundamental concerns that investors are likely worried about as well.
I think the biggest concern is hackers stealing hundreds of millions of dollars in cryptocurrencies over the last few weeks. The $600 million hack of the Poly Network hit the sector a couple of weeks ago, but those funds have now been returned. It’s a lower-profile $97 million heist last week that investors may just be hearing about. Theives have reportedly already “cleaned” $20 million in cryptocurrencies that may not be recovered and it’s possible most of the stolen cryptocurrency is gone. If hacking risk grows, it could be terrible for cryptocurrencies long-term.
The regulatory front is full of risks as well. SEC chair Gary Gensler has said he is in favor of rules that protect investors and consumers without completely killing cryptocurrencies. And for now that means treating them as securities, just like any stock or bond. That comes with a double-edged sword: On one hand, it signals legitimacy that could increase the adoption of cryptocurrencies; on the other hand, it could mean broad tax consequences for traders and investors. And with rules still up in the air, it’s not surprising to see a pullback when cryptocurrencies rise like they did yesterday.
On the trading angle, it’s not unusual for an asset to pull back after a quick increase in price. In the case of each of these cryptocurrencies, you can see that they jumped over 50% in value over the last month, before today’s pullback. Sometimes a correction is just a normal part of investing.
The battle between cryptocurrency fans and the traditional financial infrastructure continues, and it will be a volatile ride. But I think it’s clear that cryptocurrencies are carving out a niche for themselves, whether that’s as a store of value or a way to pay for goods and services. But there are still unknowns when it comes to how governments around the world will treat cryptocurrencies.
What’s most concerning long-term is the regular hacks that hit cryptocurrency wallets. If investors and consumers can’t trust that their cryptocurrency will be safe they may not adopt it as widely as many hope. And that’s ultimately what will keep cryptocurrency values from growing.
I would chalk today up as another example of volatility in cryptocurrencies, but watch the hacking and regulatory trends for cryptocurrencies because that’s what will likely tell us if this pullback is temporary or the start of a downward trend.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.