Cryptocurrency space is going through an oil boom, but can it survive the inevitable bust?
Cryptocurrency prices have been consistently declining throughout 2018, suggesting its time to manage expectations
I grew up in Montana and while my hometown was more of a tourist-friendly university town, I lived a stone’s throw away from the boom-and-bust oil-towns of rural Montana and Wyoming.
Middle-of-nowhere towns like Sydney, Montana would suddenly become one of the great wealth generators in the entire country. People would move to the town, get rich for a few years (sometimes even just months) before the boom would fade and the cities would return to the mean.
By the time I was born, there was little hand-wringing over the future of these settlements. The ideal that these places would become anything more than a temporary cash grab was long gone and the best local governments spent the boom-period figuring out how to manage their infrastructure so they were not stuck with White Elephants when it came time for the inevitable bust.
Cryptocurrencies are now going through their own “oil town” moment. The Town of Cryptocurrency boomed during the Summer and Autumn of 2017 and while I hesitate to call the beginning of 2018 “bust period”, it seems fairly obvious the moment of extreme growth has past.
So far in 2018, the price of Bitcoin has hovered between US$6,000 and US$12,000, a large range, but nothing like the US$1,000 to US$20,000 explosion of 2017.
If Bitcoin (and the seeming “peg” it provides to the whole industry), never really gets cheaper than US$6,000 and will never touch US$20,000, does it become as interesting to the mainstream? Or, like an oil-town, does it quietly go away? Leaving locals to pick up the mess and count their cash.
2018 has seen a remarkably consistent decline
Lost in the day-to-day reports about big gains and intense losses, over the last three months the price of cryptocurrencies have gone through a consistent decline.
The price of Bitcoin has dropped from over US$19,000 to US$8,174 as of publishing. Furthermore, with some peaks and valleys, the chart looks like any equity on decline.
This week, a series of bad news has seemingly tied an ankle-weight around the market. Here is a rundown:
The biggest story was Google banning cryptocurrency-related advertisements, citing concerns about consumer protection and the practice of crypto-jacking (essentially advertising on Google and when people click, leveraging their computer to mine coins).
ICOs came under fire by the US Congress — although Coindesk smartly pointed out that there was a lot of bluster and little action.
In Asia, South Korea raided three crypto exchanges on embezzlement concerns, Philippines authorities said crypto trading violates securities law and the Taiwanese Central Bank said speculators make the government hesitant to launch a crypto-coin as had been previously planned.
The result of the news is the Bitcoin market has spent most of the week hovering between US$8,000 and US$9,000. Essentially flat by typical standards.
To be fair, over the last three months their have been opportunities to make a buck:
In late-December the value of Bitcoin popped from US$12,000 to over US$17,ooo,
From early to mid February the market recovered from under US$7,000 to above US$12,000
Litecoin experienced its own bubble over the last quarter.
Plus, in context, the long-term returns are still ridiculous, according to Bloomberg’s Gadfly, even if we go back 7+ years, the returns on holdings would be 392 per cent.
But, if we look at any of the major crypto currencies (Bitcoin, Bitcoin Cash, Ethereum and Litecoin), day-to-day traders may have found opportunities to profit, but over the past three months, they’ve probably lost money.
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For 2018, is it reasonable to expect cryptocurrencies to outperform the old-school stock market? If we compare Bitcoin to a traditional market like, for example, the Nasdaq Composite Index, the answer is clearly No.
Over the past three months, Nasdaq has grown by 9.2 per cent and largely recovered from the volatility-scare of mid-February. In the same period of time, Bitcoin has plummeted by 56.6 per cent.
Even during the February mini-crash, the MSCI all-Country World Index (which attempts to measure the composite performance of the global stock market) fell by just 3.3 per cent.
The reason why this is a problem for cryptocurrencies is because they can’t sell themselves with “a solid 10 per cent annual return”. The industry is unregulated, hard to navigate and volatile. The point of investing in cryptocurrencies is to make a high-risk bet that could pay off with 392 per cent returns.
If someone bought a full coin today and sold it at the absolute peak of the last month, they would make a 32 per cent profit.
Is it worth buying $500 of Bitcoin to sell (if I’m on top of my game) for $660? Especially if the market continues it’s trend I’ll be more likely to sell for US$220?
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The result is the get-rich-quick people are heading for the exit doors. Investing in the mainstream coins is now akin to investing in a traditional equity, and the real ‘get rich quick’ opportunity is taking random stabs at ICOs and praying for serious luck.
The average person is not about to get excited about this market.
The oil boom is over, and now comes the difficult part for Cryptocurrency Town — building the infrastructure for the ‘locals’ who were around before the boom and will be around after the bust.
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Copyright: suwatpo / 123RF Stock Photo
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