WEEK’S WILD PRICE RIDE HAS SOME QUESTIONING ITS FUTURE.
DROP IN VALUE RAISES QUESTIONS ON CRYPTOCURRENCY’S FUTURE
Bitcoin faced one of its biggest tests this week, losing almost a quarter of its value after the world’s largest cryptocurrency reached a record high Monday.
The digital currency plunged as much as 30 per cent on Friday, before paring losses, as this week’s sell- off entered a fourth day with increasing momentum. Other cryptocurrencies also tumbled: ethereum dropped as much as 36 per cent and litecoin slumped as much as 43 per cent, according to composite prices on Bloomberg.
Michael Novogratz, the former Goldman Sachs Group Inc. and Fortress Investment Group LLC macro trader, said he’s shelving plans to start a cryptocurrency hedge fund and predicted that bitcoin may extend its plunge to US$8,000.
“We didn’t like market conditions and we wanted to re- evaluate what we’re doing,” Novogratz said in a phone interview. He predicted last week that bitcoin could reach US$40,000 within a few months.
Bitcoin dropped to as low as US$ 10,776, before recovering to US$12,768 at 2:01 p.m. in New York. It last traded below US$10,000 on Dec. 1, when the U. S. Commodity Futures Trading Commission agreed to allow trading in bitcoin futures. For the week, the decline is 24 per cent. The price of the digital coin had more than doubled in the prior three weeks.
This week’s losses represent a major test for the cryptocurrency industry and the blockchain technology that underpins it, which have rapidly entered the mainstream in recent weeks. Bears cast doubt on the value of the virtual assets, with UBS Group AG this week calling bitcoin the “biggest speculative bubble in history.” Bulls argue the technology is a game changer for the world of investment and finance. Both will be closely watching the outcome of the current sell-off.
“The sharks are beginning to circle here, and the futures markets may give them a venue to strike,” said Ross Norman, chief executive officer of London- based bullion dealer Sharps Pixley Ltd., which offers gold in exchange for bitcoin. “Bitcoin’s been heavily driven by retail invest- ors, but there’ll be some aggressive funds looking for the right opportunity to hammer this thing lower.”
Traders who bought the currency on futures exchanges using collateral may start facing margin calls following the price decline. Two venues launched products in recent weeks that required hefty security, with Cboe needing 44 per cent to clear contracts, and the CME 47 per cent. Brokers set safety nets even higher.
Coinbase, one of the world’s largest cryptocurrency exchanges, said all buying and selling was temporarily disabled during the rout, after having delays in processing wire transfers and verifying new customers for the past week due to higher traffic. Bitcoin transaction volume jumped more than 30 per cent on Coinbase’s GDAX exchange, while fees to approve and record the transactions on the blockchain surged to a record US$55, according to Bit Info Charts.
Many of the recent news stories and market moves connected to cryptocurrencies appear to carry hallmarks of the mania phase of a bubble. Long Island Iced Tea Corp. shares rose as much as 289 per cent after the unprofitable Hicksville, New York-based company rebranded itself Long Blockchain Corp. Bank of Japan Governor Haruhiko Kuroda said on Thursday bitcoin isn’t functioning like a normal means of payment and is being used for speculation.
Still, cryptocurrencies are attracting established players. Goldman Sachs Group Inc. is setting up a trading desk to make markets in digital currencies such as bitcoin, according to people with knowledge of the strategy. The bank aims to get the business running by the end of June, if not earlier, two of the people said.
WE DON’T LIKE MARKET CONDITIONS AND WE WANTED TO RE-EVALUATE.
• The growing frenzy around bitcoin and other cryptocurrency offerings has prompted warnings from a range of financial heavyweights on the risks that current and potential investors should keep in mind.
Bank of Canada governor Stephen Poloz sounded the alarm last week, saying that buying into the trend is “closer to gambling than investing,” while Canada’s securities regulators association issued a warning on Monday about the high level of risk associated with digital currency-linked products.
Top of mind for many is the question of just how big a bubble bitcoin is in. Virtually worthless in early 2009, the cryptocurrency hit US$1,000 by early 2017 and then soared to a record high of $ 19,666 before starting this week’s slide. Bitcoin dropped to as low as $10,776 on Friday, before recovering to $14,303 at 4:04 p.m. in New York.
The disruptive potential of bitcoin and its blockchain technology is only helping fuel the speculation and could lead it to go higher still, said BMO Financial Group chief economist Doug Porter.
“Bubbles start off with a very compelling story, a fundamental change that triggers a lot of enthusiasm and attracts a lot of investment, and often what we see happen is a good thing goes crazy. These sorts of things, whenever you get into the speculative mania, they can go a lot further and higher than many people believe is possible,” he said.
Even those who fully believe bitcoin will keep growing and help to disrupt financial systems expect the price volatility to continue.
“Even if there are corrections along the way, it will come back even stronger than before, so I’m not too worried about corrections. But for sure there is going to be volatility,” said William Mougayar, a cryptocurrency investor and author of The Business Blockchain.
But with such an astounding run-up already this year, investors are turning to the debut of other coin launches in the hopes of repeating the profits that have come to early bitcoin speculators.
The rise of initial coin offerings ( ICOs) or token offerings used by blockchain start-ups to raise money has, however, led to other risks for the casual investor.
With little regulation and more than US$ 3.6 billion raised in 234 offerings this year according to CoinSchedule, a cryptocurrency and ICO website, the area has been ripe for abuse, said University of Waterloo associate professor Jean-Paul Lam.
“There has been quite a lot of fraud already, with companies taking advantage of the frenzy in ICOs and investors thinking they can make a quick return on their investment and they would invest in a lot of these projects without doing any due diligence.
“What has surprised me is the frenzy with people not assessing risk,” said Lam.
The SEC has already cracked down on two such offerings this month, including one by Quebec- based PlexCorps that it said raised up to US$15 million from thousands of investors since August by promising a 13- fold profit in less than a month.
Another risk is t axes. While some believe their offshore wallets and decentralized ledger will allow them to hide their gains, Toronto tax lawyer Evan Kwok said the Canada Revenue Agency is actively looking into the i ssue and could begin a crackdown at any time.
Active traders of digital currencies will likely have their profits taxed as business income, while those who have sat on their holdings would be taxed under capital gains, said Kwok.
However, keeping track of gains can become complicated, since the digital exchanges don’t always provide complete transaction history, while those who actually use bitcoin to buy real-world items have to keep track of those transactions as well.
“Once you transact away from that currency, l et’s say you buy a coffee using bitcoin, that triggers a capital gain, you actually used it and liquidated your position.”
Investors also have to understand the basics of the technology, including the public wallet, private key, and how to secure your private key, said Jean- Philippe Vergne, co- director of the Scotiabank Digital Banking Lab at Western University.
He said investors also have to be wary of the cryptocurrency exchanges, as there have been numerous hacks.
But Vergne said it could still be a way to diversify holdings for certain investors. “I think for investors who are interested in adding maybe five to 10 per cent of their savings in cryptocurrency, which is a nice way to diversify and gain exposure to an up- and- coming sector of the economy, why not, it may be a good idea.”
THE UNCONTRADICTED EVIDENCE WAS THAT ALL OF THEIR ACTIVITIES WERE PERFORMED ON A VOLUNTARY BASIS, OTHER THAN TEACHING AT THE VHA, WHICH WAS A CONTRACTUAL OBLIGATION FOR WHICH THEY RECEIVED COMPENSATION. — JAMIE GOLOMBEK BUBBLES START OFF WITH A VERY COMPELLING STORY.