Financial Mail - Investors Monthly
The only certainty is uncertainty
Even before they went mainstream last year, cryptocurrencies have had some spectacular rises and falls, writes Stafford Thomas
For most of its nineyear existence bitcoin was largely the domain of holders, a group of investors following a die-hard buy-and-hold approach. Last year things began changing.
Fortunes were being made in bitcoin, proclaimed the media. It sparked a speculative scramble into bitcoin and other cryptocurrencies.
“Last year cryptocurrencies went mainstream, particularly in the second half,” says Rohan Isaacs, technical practice head at Norton Rose Fulbright.
Prices ran hard in 2017. Bitcoin, the first cryptocurrency and the one that gave the world the tamper-proof digital public ledger blockchain, had its price driven from US$1,000 at the start of 2017 to $7,000 at the end of October and a high of $19,559 on December 17.
It was a 1,856% price gain, enough to spark greed in the hearts of many with get-richquick ambitions.
Other heavyweight cryptocurrencies also put on spectacular, greed-inspiring price performances, including the sec- ond-biggest by market value, ethereum, which rocketed 16,760% in value, and the thirdbiggest, ripple, which gained a mind-boggling 51,775%.
It was all too good to be true. Bitcoin’s price began to give way in the second half of December while other cryptocurrencies held on until early January. The final outcomes were all similarly devastating.
At their worst, in early April, bitcoin’s price had fallen 59%, ethereum’s 73% and ripple’s 85%.
It was a price collapse that did not offer traders a real opportunity to profit from by going short. “The only way to go short is through bitcoin futures traded on the Chicago Mercantile Exchange,” says Dominique Collett, a senior investment executive at Rand Merchant Investment Holdings.
A number of reasons are put forward for the collapse of the cryptocurrency bubble, with the key factor appearing to have been fears of government intervention.
IMF MD Christine Lagarde has spelt it out clearly, noting
that legislation and regulation are “inevitable”.
Similar noises have been coming out of major cryptocurrency markets such as China and South Korea. In the US, the chair of the US Securities & Exchange Commission, Jay Clayton, has warned of a “crackdown” on the market.
“Legislation would be good fundamentally,” says Isaacs. “As matters now stand, investors have no protection from unscrupulous crypto coin exchanges.”
Regulators in China have started cracking down, banning the launch of new cryptocurrencies through initial coin offers (ICOs). The process involves issuers raising money from investors hoping to make a quick buck.
“ICOs can be very dangerous to get involved in,” says Collett. “Many issuers are small, dodgy start-ups.”
Forbes magazine puts it bluntly: “ICOs are attracting billions of dollars in speculative investment from hundreds of thousands of people with more money than sense.”
A research document published by EY in December estimates that almost $4bn has been raised through ICOs. The biggest markets are the US ($1.03bn), China including Hong Kong ($452m) and Russia ($310m). In SA $7m has been raised through ICOs.
Despite all the bad press for the $470bn cryptocurrency market lately, investors have come back to it to try their luck. Indeed, it could be argued that the price collapse that ended in the first week of February had more to do with the market’s inherent extreme volatility than threats of regulation.
In the past there have been several extreme price movements. The most notable and protracted slump began in November 2013 when bitcoin stood at $1,242, and ended in January 2016 with the currency at $214, a fall of 84%.
Since early this month, cryptocurrency prices have rallied. Leading the way, ethereum’s price has risen by 38%, ripple’s by 19% and bitcoin’s by 16%.
While bitcoin has been the one to back of late, will that always be the case?
Collett is firmly in the bit- coin camp. “I am not a big believer in the other currencies. I believe the biggest currency will always be the winner.”
Isaacs has a different view. “I see the winners in the long term being the currencies that have more functionality than bitcoin,” he says.
A good example is ripple, which is geared to facilitate global payments by institutions. It is also very fast, taking four seconds to complete a transaction compared with up to four hours using bitcoin.
One of ethereum’s big attractions is its ability to facilitate smart contracts secured through the use of blockchain technology.
Which way cryptocurrency prices will trend is a matter of speculation, with the only seeming probability being that volatility will be high. It is not a market to play in with money you can’t afford to lose.
“As matters now stand, investors have no protection from unscrupulous crypto coin exchanges