No longer coining it in
THIS HAS been a tough year for almost every single asset class but possibly the worst performer of all has been crypto-currency bitcoin. The virtual currency, which exists only on computers, first appeared in 2009 and made millions or even billions for those who bought early, as its value soared from just a few cents to peak at $18,941 (£14,950) on December 17, 2017.
Euphoria gripped investors, with reports of people selling their homes to buy bitcoin as some claimed the price could hit $100,000 by the end of 2018. Instead, bitcoin crashed to around $3,400 earlier this month, after losing more than 80 per cent of its value.
Those who bought at the top are likely to have lost a fortune rather than made one. So is the crypto dream now dead?
BUBBLE TROUBLE
Bitcoin was possibly the most lucrative investment in history, surging 18,000 per cent in 2017 alone.
It attracted critics as well as fans, with Nobel-prize winning economist Nouriel Roubini calling it “the mother of all bubbles” favoured by “charlatans and swindlers”, whose value was destined to crash to zero.
Some investors lost all their coins after crypto exchanges were targeted by cyber thieves, scaring many away. Governments and central bankers then threatened to clampdown on bitcoin and several thousand unregulated currencies that had sprung up in its wake, such as ethereum, ripple and litecoin. AJ Bell investment director Russ Mould said bitcoin has staged five major rallies this year, tempting true believers and speculators to hold onto their coins, or even buy more: “Unfortunately, every surge has become a vicious bear trap, leaving investors facing ever-deeper losses.”
It is following the same pattern as technology stocks after the dotcom bubble burst. Mould added: “Bitcoin may be over the worst, but it has been a painful ride for those who piled in near the top.”
POOR EXCHANGE
Jordan Hiscott, chief trader at Ayondo Markets, said the bitcoin concept was perfectly timed as traditional currencies were being devalued by central bankers printing trillions of dollars through quantitative easing, or QE: “A digitally secure, decentralised currency with a finite total amount looked like utopia to some.”
However, crypto prices were too volatile to use like normal money: “A few dozen bitcoins could have bought you a coffee in 2011, last year they could have bought a house or two. This makes it difficult to use as a means of exchange.”
Transactions were slow and expensive, and Hiscott said the idea that cryptos would replace credit cards turned out to be nonsense: “Bitcoin can process only seven transactions a second, whereas Visa does 24,000 a second.”
It ended up as pure speculation with people buying it to make a quick buck, amid suspicions of price manipulation by large active traders. Hiscott said the underlying block chain technology may thrive but the outlook for bitcoin in its current form is “highly uncertain”.
REALITY BITES
Darius McDermott, managing director of Chelsea Financial Services, said history shows what goes up quickly falls just as fast: “Bitcoin was an obvious bubble yet people still got caught up in the euphoria due to fear of missing out. The pattern has been repeated throughout history. People got carried away by Tulip Mania in the 17th century, the South Sea Bubble in the 18th and tech stocks in the 20th, and we never seem to learn from our mistakes.”
Crypto-currencies may survive in some form, but they need to become a lot more stable. McDermott said: “Speculators have not quite given up hope.”
Bitcoin climbed to around $4,000 before Christmas but has since fallen again to $3,610, punishing those who were lured in by yet another doomed rally. He added: “The FTSE 100 has also fallen this year and at today’s price, I would argue that it is a more sensible long-term investment because the companies listed on the index make and sell things in the real world.”