The only cer­tainty is un­cer­tainty

Even be­fore they went main­stream last year, cryp­tocur­ren­cies have had some spec­tac­u­lar rises and falls, writes Stafford Thomas

Financial Mail - Investors Monthly - - Front Page -

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


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