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Is it foolish to write off crypto?

The global banking establishment appears to have had enough of cryptocurrency. As Andrew Cornell cited in a recent bluenotes column Crypto’s Icarus Moment the Bank for International Settlements has described crypto as “a combination of a bubble, a Ponzi scheme and an environmental disaster”.

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I disagree. We’re over halfway through 2018 and bitcoin – the cryptocurrency firmly embedded in the internet, every financial publication since December 2017 and your dreams (or nightmares, depending on how you bought and/or sold) - is hovering around $US8,000.

"Crypto [is] a space where volatility is the norm and drastic price decreases are as common as their increases.”

That’s well over half its value at the start of the year. To traditional investors this is a red flag, a sure sign of a failing asset. But this is crypto, after all - a space where volatility is the norm and drastic price decreases are as common as their increases.

Indeed, the same people calling the death of bitcoin based on traditional market ‘logic’ were the ones who laughed at the idea of the asset’s price nearing $20,000 USD in the first place. Now the price has fallen these people are fervent with claims of ‘I told you so’ - but why should we listen to them?

The drop

Oh yeah, the drop. Both the extreme volatility and price decrease have sadly come to define crypto over the past six months; the former just as much as the latter - although often I would argue often for pessimistic, uninformed reasons.

When taking a look at the 12-month market caps for both cryptocurrencies as a whole and for bitcoin itself, it’s understandable why some – and yes, including global bank regulators - cry ‘bubble’ and talk of a price ‘collapse’.

Upon looking at the charts, we see a dramatic rise at the end of 2017 followed by an equally dramatic fall in 2018.

The sample size is small, however - over just one year. It’s no secret crypto is incredibly volatile and therefore comes with great risk for investors.

With great risk however potentially comes great reward. For example, on the pro-crypto side billionaire Mark Cuban believes once you've built up an emergency fund it's ok to put up to 10 per cent of your savings in high-risk ventures such as bitcoin and ethereum  - "if you're a true adventurer." However, you've just "got to pretend you've already lost your money," he says.

If a client approach their investment broker with a pile of money they wanted invested over the short term, would the adviser recommend for a high-risk fund? Of course not.

For anyone who happened to buy in at the top of the market, they needn’t worry – six months is a mere blip in the grand scheme of crypto.

Warren Buffett once famously said if “you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes." If we can agree crypto is infinitely more volatile than stocks, why are we so concerned over a six-month dip?

If you zoom out to the all-time price charts you can see while the recent ‘bull market’ and proceeding fall from grace is extremely evident, it’s clear bitcoin’s current price is still higher than what it was just 12 months ago - and well above the majority of any price in its history, for that matter.

The overall crypto market cap chart shows the same things. It is also worth pointing out as new highs are breached, the chart’s ceiling gets taller and thus any fall in price makes the currency appear - to the layperson at least - more volatile than it actually has been.

Zoom into six month-increments and you see far more stable-looking price action than what the all-time chart appears to suggest.

Once it is understood crypto has had many price fluctuations and extended periods of price decline in the past, 2018’s ‘bear market’ no longer looks so unique.

Price aside

Let’s wind back to December 2017. Everyone heard the unlikely success stories of bitcoin millionaires - and thus investing in cryptocurrency quickly became the new favourite topic amongst friends, social and traditional media, Uber drivers, and made experts out of anyone who took a high school economics class. 

Teenage Erik Finman told us to “find what you’re good at and find a way to make money doing it”. ‘Mr Smith’ travelled the world first class, stopping only for overnight stays in five-star restaurants. Lambo sales rocketed.

There’s not so much of this around now.

But just because the guy you met at a BBQ last summer has stopped spamming your Facebook timeline with his bitcoin posts, it doesn’t mean the underlying technology or purpose of crypto has itself disappeared.

Hype can be a good indicator of interest in a product, but the hype itself doesn’t measure its usefulness.

While price and market cap have been declining for all cryptocurrencies, development teams have continued to work on progressing the technology behind it.  Across the industry transaction speeds have increased and scalability issues are being addressed.

Bitcoin, for example, which was mocked for its slow transfer time and easily congested network, now has a growing number of nodes on its ‘lightening network’ which allow almost free and instantaneous transactions – something which will eventually become the new standard, opening up innovative ways to both pay and charge for products and services.

“Say I wanted to pay you for each minute of video I watched,” Noelle Acheson writes for CoinDesk.

“We would open up a lightning channel, and as the minutes rolled by, periodic payments would be made from my wallet to yours”

“Because the transactions are just between me and you and don't need to be broadcast to the whole network, they are almost instantaneous. And because there are no miners that need incentivising, transaction fees are low or even non-existent.”

Cryptocurrency use is also becoming easier for the average person to acquire, with the purchase of coins via fiat (traditional state-issued currencies like $US) becoming more common on exchanges.

Instead of needing to purchase your bitcoin with a credit card on one website then withdraw to a completely different platform to trade for other coins, users can now wire transfer straight to some of the world’s largest exchanges.

Exchange Binance has unveiled plans to allow fiat-crypto trading through a separate Malta-based exchange. Bittrex has similar plans after striking a deal with New York-based Signature Bank.

Favourable

While some regulatory bodies have affectively dismissed crypto as a scam, other regulatory bodies like the SEC & CTFTC have taken a more favourable, stand-off approach. Both government branches and tax agents throughout the world are now more clear on how capital gains on crypto are to be taxed, further giving the consumer more confidence.

“We owe it to this new generation to respect their enthusiasm for virtual currencies, with a thoughtful and balanced response, and not a dismissive one”, Christopher Giancarlo of the Commodity Futures Trading Commissionas told a US Senate Committee earlier in 2018.

Government agencies have “begun to see the power of cryptocurrencies to solve a lot of problems – like corruption, manipulation and fraud,” Stansberry Churchouse analyst Eric Wade says.

Further to this there are numerous high-level investors and finance ministers of world governments who see a bright future for cryptocurrencies.

“I was a neophyte a year ago,” France’s finance minister Bruno Le Maire said in May. “Now I’m passionate. It took me a year.”

BlackRock, the world’s largest asset manager, has set up a working group to explore cryptocurrencies.

Billionaire investor, Tim Draper has come out saying he believes bitcoin will reach $US250,000 by 2022. We think he’s a little more reliable than that guy at the BBQ last summer.

Price action and the attention this gets from sensationalist media aside, confidence in crypto is still well and truly alive.

Room to grow

All of the above factors are fostering an environment where crypto can flourish. Bitcoin’s anonymous creator, Satoshi Nakamoto imagined a world where the people could trade with one another without the facilitation or approval of a bank or other third party.

This dream has now clearly been achieved, and will continue to become easier to utilise and more widely adopted by the public.

Governments and banks have had numerous opportunities to squash the public’s interest in crypto, but time and time again have taken the stance of cautious observer rather than iron-fist dictator.

“There’s a use case when you have a token or currency that’s actually useful for a particular purpose, and it serves that need,” HSBC Global Head of Digital Josh Bottomley recently told Coin Telegraph.

With the hype dying down, assumptions of soon-to-be-implemented, crippling regulations now shown to be false, the maturity of the technology itself and with the ever-advancing ease of use for new consumers, the crypto industry has more room to grow than ever.

Competition between cryptocurrencies and an inevitable rebuild of market enthusiasm will burn away the coins not fit for use.

No doubt there will be more ecstatic price pumps and depressing drops, more media scaremongering around regulations and government ‘bans’, and certain coins will be ridiculed for failing to meet their ambitious tech goals. This is no different to any other fledgling industry.

If crypto’s unofficial goal is to tackle the existing financial structures of the world - a system of which has held a tight grip over society for millennia - then perhaps it isn’t fair to yet cast judgement on such an incredibly fresh aspiration.

Steve Dando is a bluenotes contributor

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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