There are a number of expressions used to describe an inability to spot what really matters amidst a mirth of irrelevant distractions. Some might be unable “to see the wood for the trees,” and are forced to “step back and look at the big picture” – all with the aim of “distinguishing the signal from the noise”.
Aslimp into 2019 after a bruising year to say the least, are we in danger of mimicking this behaviour with regard to cyber money?
There are signs that we are. Not simply in terms of heeding the gleeful reaction of cryptocurrency naysayers to the travails ofand its fellows. Such people ought to remember that there is nothing amusing or satisfying in the loss of people’s savings.
Froth blown off the top
Rather, the concern is that even those with no animus against cryptocurrency may conclude, with varying degrees of regret, that cryptos lived within a bubble, and it is time to move on.
As we’ll see, there are good reasons not to take this view. First, however, a look at how the past 12 months or so have treated cryptocurrencies. The best-known, Bitcoin, traded at $10,824.94 on 23 January 2018, and now stands at $3,578.
changed hands at $1,389.18 on 15 January last year and currently trades at about $118.84.
stood at $0.18,1160 on 8 January 2018 and is now worth about $0.02,6795. traded at $178.27 on 23 January 2018 and is now changing hands at $31.47.
was trading at $3.32 on 19 January 2018 and is now worth $0.33,084.
To say the froth has been blown off the cryptocurrency market would be an understatement, and those who saw the only way for “cryptos” as being up have been proved wrong. But equally, those who see continued decline as inevitable may be making the same mistake in reverse.
First, tightening monetary policy in the US, the eurozone and the UK will almost certainly have played a part. Very low interest rates and the “quantitative easing” money-creation policies led to the inflation of almost all assets, cryptocurrencies included.
But this is unlikely to mean a permanent aversion among traders and investors for real-estate, stocks, commodities and the rest. There is no reason to believe that cryptocurrencies will prove to be any different.
Industry needs to explain “forking” more clearly
Second, regulators on both sides of the Atlantic have taken an increasing interest in cryptocurrencies and, in particular, the “initial coin offerings” (ICOs) through which new “cryptos” are launched. This has led long-standing critics to claim that the authorities are finally catching up with a dubious and under-regulated market.
But the critics cannot have it both ways. Either tighter regulation will bring cryptocurrencies closer to conventional asset classes – in which case it will burnish their attraction to traders and investors – or the previous, unregulated cryptocurrency market was more profitable than is likely to be the case in future, and as such, their criticisms of the way things were do not hold water.
Third, the practice of “forking” has not been well-understood by traders and investors – which suggests the industry needs to explain itself more clearly – and this has played a part in dulling the attraction of cryptocurrencies.
Put simply, a fork is the creation of a new currency from an old one, either because the cryptocurrency provider wishes to create two separate assets or because a change in software requires the replacement of one currency with a successor.
Understandably, some traders and investors have become nervous about forking, given it involves their assets being changed without their permission. But much the same can be said of share splits, designed to make highly-priced stock more tradable, and nobody is put off equity trading as a result.
This is a sector ripe for consolidation, not merely involving the fringe cryptocurrencies but some of the better-known brands of cyber cash. At issue is not only economies of scale but the question of whether cryptocurrency tends towards monopoly.
Put another way, how many Bitcoin-type operators do we need? The answer will depend on the extent to which different cryptocurrencies offer distinctive features, “unique selling points” in the jargon. Without such features, the money will gravitate towards those cryptocurrencies that are better-known and most widely acceptable in retail and other uses.
Whatever industry configuration emerges, it seems unlikely the world will need the number of cryptocurrencies currently available. The current “scramble into crypto” has been compared to the manias of the past for building canals and railways, manias that were interrupted by “busts” but which in the long term provided both enduring infrastructure and good returns for traders with strong nerves and an eye to the future.
Some criticism nonsensical
An alternative comparison may be with the innovative financial products of the last century, such as hire purchase or credit cards. Here, tentative adoption would be followed by breakneck growth and then some sort of sharp correction.
At this point, both naysayers and neutral observers would conclude that a bubble had burst and it was time to go back to the way things used to be. They were, of course, wrong.
In all these examples, the basic premise is the same. Are people always going to want transport facilities and consumer credit? If the answer is yes, then short-term tumbles are no cause for long-term concern.
Finally, the argument that “imagine you had bought cryptocurrencies at the top of the market” is no argument at all. It suggests no asset should ever fall in value, a nonsensical proposition.
Or, to end where we began, it is the trees, not the wood, and noise, not signal.