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Point of View

Crypto Carnage

By Mark Ward, Head of Trading

Back in November we asked: is bitcoin a bubble, a scam or the future? Whether it is a scam, or the future is still open for debate, but it’s now looking a lot like a popped bubble.
Investors and speculators have endured a roller-coaster Crypto ride, not seen since the dot-com boom (and bust) 18 years ago. Bitcoin has gone from daily mentions in the news, press and online socials, to near-total media silence.

The making of a bubble

Shortly after our last Bitcoin article was published, it’s value rocketed from $11,000 to $20,000. News of ‘Bitcoin billionaires’ started emerging, and the snowball of buyers grew and grew. Many established companies jumped on the bandwagon:

  • Eastman Kodak (the 130-year-old photo and printing company) announced they were producing a Crypto currency, and their shares went from $3 to $12 overnight. They’ve since dropped back to under $4.
  • Long Island Iced Tea (the beverage company) went even further, announcing that they were ceasing all vending machine and drinks distribution, liquidating their assets, and placing it all into Blockchain and Crypto. They renamed their company Long Blockchain, and their shares went from $1.50 to $7, then back to $2.
  • Dozens of other companies also renamed themselves to contain the words ‘Crypto, Blockchain, Bitcoin’ etc., and saw similar price spikes.

These extreme moves prompted serious concerns from national exchanges and regulators, particularly in the US, and with good reason. Many retail investors have since been all but wiped out by the crash after purchasing company shares right at the top of the market.

What triggered the crash?

As 2018 was ushered in, Bitcoin crashed to around $9,000, wiping billions from the currency’s market cap and speculators’ bank accounts. The second biggest Crypto – Ethereum – dropped from around $1,300 to less than half that. The much-hyped Bitcoin Futures that are now tradable in the US ended up being a damp squib, and an ETF backed by a major issuer still does not exist.
In classic bubble style, early investors watched their riches grow, media interest generated retail interest, fear of missing out kicked in which prompted more investment and even more rapid growth. Regulation then caught up, common sense prevailed, and early investors dumped their holdings precipitating a race to the door. The asset views then polarised, with one side saying that this time next year Bitcoin will be at $50,000, while others say it will slide to zero.

Is there a future for Cryptocurrencies?

To be fair to the Crypto bulls, the underlying Blockchain technology is useful and is still in the early stages of development. It has a lot of potential to be a very disruptive and leading technology, particularly in financial services companies. The only real way previously to gain exposure to Blockchain was via Bitcoin, which is only finite in its supply, so a price rise was inevitable.
Bitcoin is also very useful in situations where rampant inflation renders local currency unattractive. Zimbabwe and Venezuela are huge markets for holders of Crypto as a more stable alternative to their own hard cash. Even with 10–20% daily swings in Bitcoin prices, it is still considered more desirable locally than Zimbabwe dollars or the Venezuelan bolivar, where US dollars and euros are all but impossible to obtain unless bought on the black market.
The problem, because of the extreme volatility, is that most big banks are refusing to allow investors to trade Crypto, many credit card companies are blocking Crypto purchases, major central banks are advising extreme caution and national financial regulators are now catching up. For example, South Korea is a major market for Crypto and no longer allows anonymous trading. Government officials there are also banned from holding any Cryptocurrency and all foreign residents are completely barred from trading.
Major hacking scandals have also deterred investors. Only last month, Coincheck, a major Crypto exchange, was compromised and over $530m was stolen. The money is unrecoverable. North Korea and Russia are thought to be engaged in large-scale, state-sponsored hacking programs as a response to Western sanctions and are accused of almost all the global exchange attacks. Bitcoin is also struggling to shake off the notion that its primary purpose is to facilitate payment for illicit services. For most of the population, there’s no need to hide what they’re buying and selling on the internet, so fiat currency is more than sufficient, with none of the long processing times or risks involved.

In conclusion

In the last article, we talked about the three things that need to happen for Bitcoin to really take off: central bank and official government endorsement; a reduction of transaction times and hacking risks involved; and price volatility stabilisation. None of these have happened.
The astronomical rise in Bitcoin prices wasn’t due to any underlying usefulness in the ‘coin’ itself being suddenly realised by the masses – it was solely propped up by sentiment, which has waned, along with media interest. It’s not to say that Bitcoin and other Cryptos will disappear or become worthless, but it’s hard to argue that they haven’t seen a traditional boom-and-bust price move like Dutch tulips or 1999-2000 technology companies.
Some companies more than survived the dot-com boom (Microsoft, Amazon, Apple and Oracle) and are among the biggest firms in the world, but it took them many years to recover and the majority vanished. Indeed, the NASDAQ Index (comprising mostly larger-cap US technology companies) only reached the same level as December 1999 at the start of January this year – nearly two decades later.
We still believe Bitcoin and Crypto are speculative, with bubble characteristics, and their purchase as an investment strategy is not recommended. This view was reinforced by recent price corrections.

Past performance is no guide to future performance.  Cryptocurrencies are speculative investments and all your capital is at risk.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.