The cryptocurrency markets are in a bloodbath. Total market capitalization has crashed, bounced, and cratered from an all-time high of $835 billion in January to a low of $102 billion currently. Bitcoin (BTC), Ethereum (ETH), and other majors have declined over 80%, and some altcoins died completely. The obvious reason for the bleeding is decreased demand. Selling by the Mt. Gox trustee and other whales last winter sparked the downturn, but a steady decrease in investor demand prolonged and deepened it. My theory is that insurmountable competition from other markets caused cryptocurrency to enter its dying stage.

Last December, the US government enacted a historic tax reform bill that cut taxes on the wealthy, upper-middle class, and corporations. The ballooning federal deficit equals private savings, so fiscal flows entered the financial and physical markets. But logically it follows that the increased capital disproportionately invested in equities, bonds, and cash, not cryptocurrency. The Trump tax law was designed to incentivize higher stock prices through easier repatriation of foreign profits and buyback programs to boost earnings and shareholder value. Also, the law punished cryptocurrency investors and traders through a provision that makes individual coin-to-coin trades taxable, whereas such taxation was once deferred. The tax law and several increased spending resolutions created exploding deficits that contributed to higher inflation, spurring the Federal Reserve to aggressively raise interest rates. Rising interest rates make fixed income and high-yield savings accounts more attractive, so people purchased bonds and cash instruments yielding above 2% instead of inflationary coins.

Ironically, cryptocurrency also faces fierce competition from itself in the form of blockchain and fintech startups. In 2017 and 2018, cryptocurrency-related startups raised record amounts of fundraising from hedge funds, university endowments, family offices, and venture capital firms. But such investments were usually made in private equity, not the coins themselves. Regulatory, insurance, and storage concerns are why institutions still do not trust direct investment in coins. As the startups like Circle, Huobi, Coinbase, and other giants grow with more investment, smaller coin projects will be more endangered. The investment appeal of big cryptocurrency institutions, mostly exchanges and stablecoins, crowds out direct investment in coins and tokens. Because retail investors are legally prohibited from investing in private equity, their funds cannot make up the difference. Newer, smaller coin projects with no press or empirical results do not survive the fierce competition for scarce investment opportunities.

It is easy to conclude that the global regulatory crackdown on initial coin offerings (ICOs) and the peril of irrational exuberance caused the bear market, but ICOs and speculation alone did not destroy coin values by a factor of 8. The fundamental factors based on market competition, thanks to American fiscal changes and oligopolistic behavior in the blockchain space, pressured investors to continue selling. The Federal Reserve is still on a path to raise rates, and inflows to stocks, bonds, and cash continue to eclipse inflows to crypto. As institutional investors become more frightened of crypto losses, they exacerbate the competition problem by investing in startup equity. Until reforms in fiscal flows and investment competition occur, cryptocurrency markets will likely keep bleeding.

The author owns a small amount of BTC.