The ups and downs of cryptocurrencies
The ups and downs of cryptocurrencies
It’s been a heady few months for cryptocurrencies globally, with one of the original currencies, Bitcoin, soaring in value and governments announcing various plans to try to tame the phenomenon. Predicting what will happen to Bitcoin and other cryptocurrencies has become a cottage industry.
Early in January, mainstream media outlets reported that the North American Bitcoin Conference, which was held in Miami, was not accepting Bitcoins for ticket payments. The conference organisers had imposed a 14-day pre-conference deadline for accepting Bitcoin payments. Despite the digital nature of the currency, the organisers had to manually input the Bitcoin payment data into their ticketing platform and they argued this prevented them accepting “last minute” cryptocurrency purchases.
Despite the embarrassing ticketing issue, the event went ahead and as bitcoin.com reported, attracted thousands of delegates. During the event, 31 companies pitched their initial coin offerings.
Bitcoin’s value soared during 2017, hitting a high of $19,850 in mid-December before falling back to $12,000 within a few days. The price has been fluctuating ever since. Many commentators point to this as evidence of a Bitcoin bubble that will soon burst and warn investors away from the currency as a store of value.
One of the delegates at the Bitcoin Conference, Max Gulker, a senior research fellow at the American Institute for Economic Research, says the resemblance to the dotcom “mania” of the late 1990s is undeniable. “But when people call Bitcoin and the crypto space a bubble, their implication usually is that it doesn’t matter and will go away soon,” he says. “I don’t think that’s an accurate characterisation.”
If the cryptocurrency landscape suffered the same type of downturn that occurred during the dotcom crash, investor value would be lost, he says. But pre-dotcom crash, the 280 stocks deemed to be dotcoms peaked at $3 trillion in market capitalisation; during the crash more than $1.7 trillion in value was lost. However, the market cap of cryptocurrencies (Bitcoin and the many other coins in the market) amounts to about $500 billion at present.
“The amount of investor money at stake is considerably less than it was during the dotcom crash, but not out of the realm of comparison. A crash would cost investors at least a few hundred billion dollars. Would that be enough to spill over into the wider economy and cause an overall downturn? It’s hard to say.”
Comparing an asset or currency like Bitcoin to stocks is fraught with pitfalls, says Gulker. However, pre-crash, Amazon’s initial public offering (IPO) price was $18, which climbed to more than $100, before dropping below $10 during the crash. Today it trades at more than $100 per share. Similar stories can be told about eBay and Facebook. Even if the most well-known cryptocurrencies endured seemingly catastrophic drops in price, it does not mean they would cease to be relevant or wouldn’t recover value with time, he adds.
As a payment instrument, Bitcoin has some way to go before it becomes as ubiquitous as cash or cards. Its fluctuating value and an increase in transaction fees has rendered small transactions uneconomic. By the time a payment goes through, the price of Bitcoin may have fallen dramatically, causing companies to lose money from the transaction. Users may also have to make repeated payments to complete the transactions, each time incurring a new fee that can easily run to more than $20.
When Bitcoin was launched about nine years ago, some of the initial excitement was about its potential to disintermediate banks from payments. It was described by its creator as a new electronic cash system that was fully peer-to-peer, with no trusted third party. So, from the outset banks and financial authorities didn’t take to the idea of the cryptocurrency…
By Heather McKenzie
This is an excerpt. The full article is available in the February 2018 edition of the Banking Technology magazine.
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