2017 has been an incredible year for the cryptocurrency market. Bitcoin went mainstream as an alternative investment, the initial coin offerings (ICO) market exploded to raise over $4 billion dollars for blockchain startups, and by the end of the year, it seemed like everyone wanted to jump onto the crypto money train. 2018 will bring new opportunities as well as challenges for cryptocurrency investors.
In this article, you will be introduced to five key aspects that digital currency investors will need to look out for in 2018.
1. Regulatory changes
In light of the exuberant rise in the value of bitcoin and other cryptocurrencies, regulators and lawmakers feel that the time has come to introduce legislation and regulations that cover the use of digital assets. This trend started in 2017 and will definitely continue this year as lawmakers in the UK, Europe, and other regions have already announced that a regulatory framework needs to be put into place to cover decentralized digital currencies. In an extreme example, an outright ban of cryptocurrencies could happen overnight, which would suddenly mean that bitcoin traders could unwillingly find themselves on the wrong side of the law.
Regulatory changes in major bitcoin economies such as China, South Korea, Japan and the U.S. could also affect asset prices — so cryptocurrency investors will need to position portfolios accordingly and keep a close eye on regulatory developments at home and abroad.
2. User verification
Most large digital currency exchanges require users to fully verify their identity to comply with KYC/AML regulations. This is especially the case if users want to withdraw fiat currency from exchanges. However, not all exchanges require user verification yet. This will likely change in 2018 as more and more regulators are honing in on bitcoin exchanges in an attempt to prevent money laundering, terrorist financing as well as tax evasion through the use of digital currencies.
Hence, when signing up to an exchange it will be best to also fully verify oneself to prevent withdrawal limitation or a potential freezing of funds should KYC/AML regulations in the exchange’s jurisdiction suddenly change.
3. ICO slow down
The initial coin offerings market had one hell of a year in 2017. Blockchain projects managed to raise over $4 billion through this new form of startup financing and investors in many newly-issued ICO tokens were rewarded with several hundred percent returns on their investments. Nonetheless, the ICO market started to slow down in the fourth quarter of 2017 as the market became increasingly flooded with mediocre projects that no longer managed to entice investors and that in many cases did not even have a finished product.
In light of a recent Deloitte study, which stated that over 92 percent of launched blockchain projects never led to a product or service, more and more investors are moving back to “blue chip” coins and away from highly risky ICO tokens.
This trend will likely also continue in 2018. Projects launching ICOs will — for the most part — struggle to raise anywhere close to the staggering sums raised in 2017. In addition to the disappointing token performance of many mediocre ICO projects, the excellent performance of bitcoin and leading altcoins.at the end of 2017 will likely also be a factor in investors moving away from ICOs After all, if established coins such as dash, ether, and litecoin are generating a one-year return on investment of over 1,000 percent, why would investors choose to invest in high-risk tokens that can easily become worthless if the issuing startup does not manage to deliver?
In 2018, the tax authorities will also be keen to get their piece of the crypto pie. More detailed guidance and legislation in relation to the taxation of cryptocurrency investment profit will likely also become a fact of life in 2018 and cryptocurrency traders will be expected to declare their gains on their annual tax returns.
Tax authorities such as the U.S. Internal Revenue Service and the South African Revenue Service have already announced that they are using blockchain tracking software to locate cryptocurrency traders who have not been appropriately declaring their investment income.
Once clear guidance has put into place, tax authorities will see more cryptocurrency investment income appear on capital gains tax declaration forms as traders will declare their digital currency investment gains in the same manner as they have been doing for their traditional asset portfolios.
5. Institutional investor inflows
Finally, and perhaps most importantly, will be the potential wave of institutional funds that look set to enter the cryptocurrency market this year. In 2017, over 75 digital currency-focused hedge funds have been launched and private banks and brokerages have started to offer bitcoin as an investment. Then, in December, we saw the listing of bitcoin futures contracts on two of the largest derivative exchanges in the U.S. — the CME and the CBOE — which opened up bitcoin investment to any institutional investor who is permitted to purchase futures as part of their investment guidelines.
Furthermore, since bitcoin futures contracts have been approved by the U.S. CFTC, the potential regulatory approval of bitcoin ETFs is now also back on the table.
Given that most funds invested in cryptocurrency to date have come from private investors and a handful of high net worth individuals, the potential for the multiplication of value of many of the leading cryptocurrencies is substantial once the institutional investor market enters the digital asset space in full force.
While a price of bitcoin at $16,000 and ether at $1,000 might seem expensive to investors today, by the end of 2018 these could turn out to have been cheap entry levels if institutional investors decide to really jump into crypto over the next twelve months. And in light of cryptocurrency returns compared to stock, bonds and commodity returns in recent years, this is a likely scenario.