Cryptocurrency markets were under renewed strain in 2018 as bitcoin and other tokens lost value and investors reassessed the risks behind the boom. Bitcoin had fallen about 25 percent in a week by Wednesday and was more than 75 percent below its December peak.
The slide reflected more than a simple market correction. It exposed how heavily the sector depended on exchanges and trading systems that operate with little regulatory oversight, especially outside the United States.
Researchers at the University of Texas said this year that Bitfinex, one of the largest exchanges, had helped create Tether, a digital currency that was allegedly used to inflate the price of bitcoin and other tokens. Bloomberg later reported that the Justice Department was investigating possible price manipulation involving Tether.
Tether is meant to be backed one-for-one by dollars held in a bank account, but Bitfinex and Tether managers have struggled to show that such backing exists. As confidence weakened, traders sold Tether at a loss simply to get their money out.
Questions also surrounded OKEx, another major exchange. Amber AI, a hedge fund, said the platform changed trading rules without warning and that customers appeared to have lost millions of dollars. OKEx apologized for some of the changes, saying they were made to cope with chaotic trading, but it did not accept the reported losses.
Regulators were also tightening their grip on the sector. Much of the excitement in the previous year had come from initial coin offerings, but lawyers warned that many of those sales likely ran afoul of securities rules. The Securities and Exchange Commission then stepped up enforcement, including actions on Friday against two companies that were ordered to return money to investors.
The industry’s own structure added to the confusion. Bitcoin’s open-source software was released in January 2009, and the community once worked closely to improve it. That cooperation broke down after a split last year produced Bitcoin Cash, which fractured again this week into Bitcoin ABC and Bitcoin SV.
Those forks did not change bitcoin itself, but they created chaos for exchanges and traders trying to determine which coin they were handling. They also renewed debate over scarcity, one of the main claims behind cryptocurrencies. Bitcoin’s creator said only 21 million coins would ever exist, but repeated copies and forks have weakened that argument.
Beyond the market turmoil, cryptocurrencies continued to struggle to prove their usefulness. Bitcoin was supposed to make cross-border payments easier, and Ethereum was promoted as a global computing network. In practice, most tokens were being used for speculation rather than everyday transactions.
Technical problems also slowed wider adoption, and developers had not delivered fixes quickly enough. Even so, Christine Lagarde, the head of the International Monetary Fund, said in a speech last week that central banks and countries might want to issue digital currencies of their own, while warning that governments could manage trust and oversight better than private tokens.
Those remarks added to the pressure on existing cryptocurrencies, which were already facing a market that had become far less forgiving than it was during the boom.
