Can The Crypto Winter Become a Digital Spring?
By: David Hannigan
My exposure to the crypto market is somewhat brief compared to my almost 30 years involved with the global foreign exchange markets. So it amazes me when I read analysis and commentary, and Twitter and LinkedIn posts on this somewhat new digital world. Ask for opinions on Bitcoin and you will likely be presented with two polarizing views.
The digital evangelists will refer to a central bank conspiracy theory coupled with a view that the current financial system has been ‘ripping us off’ for years and anyone disagreeing clearly doesn’t know what they are talking about. Or the naysayers believe that any coin or token is essentially worthless and this crypto ‘thing’ is akin to a Hans Christian Anderson fairy story. However, I find myself sitting on the proverbial fence of indecision, somehow able to see both sides of the argument but unable, at least as of yet, to convincingly side with either camp. With that in mind I’ll review the year gone by and what will shape the year to come.
A look back at 2018
Even the most devoted followers of all things digital would be hard-pressed to find the positives from the previous 12 months. Phrases such as ‘Tulip Mania’, ‘Digital Winter’ and ‘Crypto Crash’ have all been readily applied to a year that crypto would rather forget. And from a pure price standpoint, the facts are hard to ignore. One week into 2018, Bitcoin was trading near $17,000 and Ethereum over $1,400. With a week to go before Christmas, they had dropped to $3,200 and $80 respectively. If they were a Fortune 500 company, the respective CEOs would have likely jumped before they were pushed and trying to justify the argument that crypto represented a store of value would be a tough sell for any salesman.
Yes, unlike for the equity markets, there was a late ‘Santa rally’ to end the year, but it did little to disguise the fact that crypto was the worst performing asset class of the year.
So, what exactly caused this ‘bubble’ to form and why did it pop so dramatically? Being a financial markets trader spanning four decades, I could give the rather flippant answer of ‘more buyers than sellers followed by more sellers than buyers.’ Technically, tough to argue with. But why did it happen? I’ll give two reasons.
1. FOMO. (The crypto world does love an acronym). Fear Of Missing Out. A real social phenomenon that can regularly be seen across financial markets, although not usually on this scale. Just the sheer rush to get in on the act was enough to play a major role in driving crypto prices parabolically higher, in markets that lacked liquidity or institutional involvement. One of the most important rules of investing is to define the level you wish to enter a trade and this was abandoned with the consequences for all to see. Admittedly the term ‘HODL’ had its derivation circa 2013, but with so many entering the crypto market at such elevated levels, 2018 could certainly be described as the year of HODLER!
2. ICOs. Initial Coin Offerings. Hundreds of them. Investors would drive up the price of Bitcoin or Ethereum as they would buy them to use as payment for the next great digital offering. In reality, many of these projects failed before they started. Those startups that were legitimate and did survive would need to convert the funds raised in crypto back to FIAT money in order to pay for development and operating expenses. The end result was that crypto prices retreated almost as quickly as they had advanced.
I am sure there are other contributing factors to the fall in crypto values over the past year. The lack of visible real-world adoption could certainly be an additional drag. But for me those are the two overriding catalysts behind the price action of 2018.
Looking Ahead
From the Crypto Winter of 2018, can we emerge into the Digital Spring of 2019? Is it all doom and gloom or will the storms of last year be forgotten as the warmth of a new season dawns upon us? Learned gentlemen such as Minneapolis Federal President Neel Kashkari have described the Bitcoin market as a ‘farce’ with the leading crypto coin being for ‘toy collectors’. On the other hand, renowned American businessman John McAfee has predicted the same coin will reach a value of $1,000,000 by the end of 2020 and has promised to eat a rather eye-watering part of his anatomy if wrong! Who am I to stand between such diverse opinions, so I will personally refrain from making any of my own price predictions. However, I will highlight some events that will go a long way to determining where crypto values are in a year’s time.
As investors lick their wounds from the sell-off over the past 12 months, many will start to question the whole validity of cryptocurrencies and digital tokenization. Before we get too down on ourselves, let’s remember that any strides forward in technology and indeed the very way we live our lives and go about our daily business, are not without challenges and bumps along the way. Ben Horowitz, co-founder of the venture capital firm Andreesson Horowitz found the perfect historical analogy to the current state of the crypto world:
“It reminds me of the dotcom in the nineties. Like somebody who invested in a scummy dotcom and got burned, goes like, oh no I don’t believe in this whole internet thing. The dumb thing wasn’t actually to invest in a scam, but it was to give up on the internet because there were some stupid people in it”
The future of the crypto markets is far from clear, but applying this analogy would make perfect sense in the current environment. Sure, 2018 was a tough year. Many projects should never have been made available to investors and the subsequent spike in ICOs played a major role in the unwanted price action in the crypto markets. But as we move forward, there is no doubting that blockchain technology is here to stay. Some sort of digital currency seems almost certain to play a role in all our futures. So what will drive the markets this year? I’ve outlined a number of factors below:
1. Real-world adoption. An obvious catalyst to improving current crypto values is for there to be the broader adoption of cryptocurrency in our everyday lives. As I recently highlighted in one of my commentaries, the great US State of Ohio is ready to start accepting Bitcoin for payment of taxes. US online retailer Overstock has announced it will take advantage of this opportunity in 2019. Positive developments, but are there real advantages for both parties? Time will tell. At a more micro level I was recently taken aback by the following sign in my local Turkish restaurant — food for thought, literally!
2. Regulation. The real crypto evangelists might start to shake with rage at the very thought of regulation being a positive. Is not the whole idea of crypto to get away from centralized authority and those in government positions telling us what can and cannot be done? Maybe. But the whole crypto space is full of scams and scammers and they need to be weeded out with consequences for the bad actors. Those legitimate participants need to know, with clarity, what they can and can not do. Investors need to know they are protected and adequate oversight is in place. Whether there is a global code of conduct similar to the type recently adopted by the FX markets or localized rules and regulations, the markets and digital projects alike need clear guidance and guidelines. Done well, it can make the crypto markets that much more appealing, especially to institutional investors who thus far have been conspicuous by their absence. Done badly and FIAT will continue to rule the roost.
3. Institutional investors. While the past year has seen a drastic decline in crypto values it has also been somewhat of a rollercoaster rather than a one-dimensional sell-off. Intra-day moves of 10% or more, are not uncommon even in the better capitalized coins. The major reason for this is a lack of liquidity which is a function of current market participants. While being somewhat of a ‘chicken or egg’ situation, the markets desperately need institutional participation. Some well-known companies are gearing up for that to happen, with US brokerage Fidelity leading the way. Fidelity Digital Assets will handle trade execution and custody for institutional investors such as hedge funds and family offices. On the flip side, some banks have been seen to shelve plans to open crypto trading desks as well as provide custody services. How this space develops will have a major impact on crypto markets and asset values going forward.
4. ETF approval. Thus far the US SEC has failed to approve any ETF applications citing concerns around price manipulation as well as the lack of a derivatives market. Although Bitcoin futures did start trading in 2018, the current market is not deep enough to dampen the SEC’s concerns. 2019 should see the launch of the Intercontinental Exchange’s Bakkt platform which has just recently raised $182 million in funding. Although the initial launch date of January 24th has been put back, having an addition to the current CME futures offering should be a major positive. With that the current ETF application from SolidX and VanEck will receive a judgement from the SEC by the end of February. If approved, it could see a significant inflow of funds into Bitcoin. If not, the market will no doubt voice its frustration and could well see a negative impact on current prices.
5. Survival of the fittest and differentiation. A quick look at a leading website for listed coins and tokens shows over 2,000 listed. 2,000! Going back to the dotcom analogy, you have to feel that many of these are going to struggle to survive. Conversely, there could well be another Amazon or Apple in the making. The point is, like any ecosystem, the fittest need to emerge and differentiate themselves from the competition. As an analyst of daily crypto price movements, I still find it alarming that when Bitcoin moves 5%, the whole market follows. Yes, there are occasional news events that should move the broad market, but not every day. More attention needs to be paid to individual projects and technologies, with the strongest attracting investor funds and the weakest falling away.
Final Thoughts
There is much to be positive about as we embark on a new year. The crypto and digital markets are nowhere near their full maturity and although 2018 has left many investors bruised and battered, much can be learned from the experience. 2019 will hold a number of key events which will no doubt affect the current price of crypto assets. To speculate which way that will go is beyond my remit, but there are plenty of opportunities for positive developments. Let’s see where we are in a year’s time!
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