Bitcoin crash gives way to steady growth
Originally posted by Derek Parker @ intheblack.com
The price of bitcoin has crashed in early 2019 but some experts in the field argue that the news is not all bad, with the future for cryptocurrencies looking fairly strong.
At the end of January 2019, the price of bitcoin was US$3525, having slumped from a peak of over US$19,000 in late 2017. This is not the first crash in a market known for its volatility, and in previous downswings the price has eventually settled at a point that shows a long-term upwards trend. For example, at the start of 2017 the price was about US$975.
The general feeling in the market is that much of the massive movement seen in the past two years was driven by speculative activity in the cryptocurrency sector.
“There was certainly a run-up of strong speculative interest in bitcoin in late 2017, which has fortunately now dissipated,” says Jason Potts, RMIT University professor of economics and director of the university’s Blockchain Innovation Hub.
“The crash is certainly alarming for those who bought in during the bubble but it has also served to flush out purely speculative traders. It was a good bubble to have, as it brought a lot of attention to the sector as a whole. Real investment by developers in building product and writing code has continued apace through 2018 and is deeper than ever now.”
Potts believes that the bitcoin market will be more stable in 2019, but he emphasises that crypto-assets are an early-stage technology, so a level of volatility can be expected for some years to come.
However, Lee Smales, associate professor of finance at the University of Western Australia, takes a different view.
“In some ways it reminds me of the dot-com boom,” he says. “At some point, prices stopped rising and investors finally started to think about the underlying issues of the securities they were buying. As soon as prices stop going up – when you can’t find a ‘bigger fool’ to sell to – then investors start to get nervous and start to sell. It can become a vigorous downward cycle.”
In fact, the majority of cryptocurrency prices have fallen over the past year. The average decline of the nine major cryptocurrencies is about eighty percent. Bitcoin got off relatively lightly.
Long-term benefits of a bitcoin price drop
Asher Tan, co-founder and CEO of the CoinJar digital currency exchange, agrees that the drop will have long-term benefits.
He says huge interest, compounded by bottlenecks of liquidity, technology scalability, and capability of businesses servicing the sector drove the quick rise – and quicker drop – in prices.
“I believe that the long-run trend continues to be a good reflection of the pace of advancement in the industry.”
Tan says that if the industry is progressing, the prices of cryptocurrencies would maintain in the current band or increase, reflecting the growing utility and opportunity in the sector.
Both Tan and Potts acknowledge that the Australian investment community, at both the retail and institutional levels, has to do more to increase understanding of crypto-assets. They also note, however, that there is more information available than ever before, and journalists working in the investment field are becoming more knowledgeable. That is feeding through to advisers and planners, so that crypto-assets are likely to eventually become a standard part of retail investment portfolios.
Smales agrees that financial understanding needs improvement.
“It is important that investors are aware of the risks involved in trading this type of highly speculative asset, and don’t just focus on the price gains of the past,” he says.
“Advisers should underline that to investors who show an interest in cryptocurrencies.”
Another factor in the crash was the entry of many new players, which acted to fragment and destabilise the market. Longer-term, there is also the threat of powerful players such as Google, PayPal, AliPay or WeChat entering the space, creating serious problems for cryptocurrencies with a reputation for volatility and unreliability.
The market instability associated with cryptocurrencies can be exacerbated by unpredictable events. Recently, Canada’s biggest cryptocurrency exchange, Quadriga, announced that it was unable to gain access to $145 million of bitcoin and other digital assets after its CEO, the only person with the vault password, unexpectedly died while traveling in India. This is a market in which a lot of things can go wrong.
The regulatory picture for bitcoin
Institutional investors have been wary of crypto-assets, especially bitcoin, due to the volatility of the market, but they remain interested, and that has not been dampened by the bitcoin price crash.
“Significantly, the regulatory picture is beginning to firm up,” says Potts.
“Particular jurisdictions – states such as Wyoming in the US, or countries such as Malta or Bermuda – are now providing clear regulatory guidance that enables risks to be quantified.
We are also seeing major financial institutions beginning to offer exchange services, although this is in its very early stages.”
In Australia, a framework is emerging from new interpretations of existing regulations and law, rather than from the passage of new law.
Corporate regulator, the Australian Securities and Investments Commission (ASIC), has indicated that initial coin offerings, for example, are financial products and will be bound by the Corporations Act* (see note below).
“On the whole, regulators are finally starting to provide guidance and clarity. This is a welcome development.”
Bitcoin: an asset class here to stay
Tan also sees further development underway. He says that while most institutional investors will not have a mandate to invest in cryptocurrencies in the short term, many have already extended their existing operations to accommodate what they view as an asset class that is here to stay.
“A US example is financial services provider Fidelity Investments. It has launched a digital asset arm, Fidelity Digital Asset Services, to provide cryptocurrency custody and trading services for enterprise clients. At CoinJar we recently launched a low-fee, index-style cryptocurrency fund in the form of a regulated managed investment scheme.”
Tan also points to emerging innovations such as security tokens and stablecoins as possibly providing another avenue for investors looking to enter the crypto-asset market in 2019.
Smales believes that digital currencies will eventually find a place in the financial landscape, even though he is not positive about the future valuation of bitcoin. But he points out that at present there are relatively few outlets that readily accept bitcoin in exchange for goods, and the transaction costs of selling bitcoin holdings are high compared to traditional assets.
“We are moving irrevocably toward a cashless society, especially the younger generation,” he says.
“On that basis cryptocurrencies and digital currencies are here to stay. But there is also a reasonable likelihood that central banks may end up entering the field and issuing their own digital currencies, although they would not be decentralised. That would be a very big change and would certainly place further price pressure on existing cryptocurrencies.”
MoU provides future path
A Memorandum of Understanding (MoU) between CPA Australia and the RMIT Blockchain Innovation Hub to help accounting professionals learn about crypto-assets and their connection with blockchain technology presents crucial opportunities, says Potts.
“Blockchain technology allows a whole new approach to how companies manage and share data with substantial technical, organisational and regulatory challenges. It is therefore important to have world-leading research centre working with Australia’s top industry association to guide this transition. It’s a very exciting way of moving into the future.”