The future, declared American baseball legend Yogi Berra, is not what it used to be. Cryptocurrency traders may be tempted to agree.
If 2018 was a turbulent time in the world of digital currencies, 2019 promises to be no less so. On the one hand, legal and regulatory pressures are closing in and rival offerings from the financial mainstream are being discussed.
Off their recent peaks
On the other hand, the blockchain technology that underpins cryptocurrencies is gaining ever-wider acceptance and many believe the cyber-money revolution, far from being over, has hardly started.
All this for investors to worry about even before they address such mundane matters as the performance of the cryptocurrencies in which they have invested. Here, the picture is mixed, to say the least.
Rival currency Ethereum peaked on 11 January 2018 at $1,221,69 and, similarly, began a long slide to about $224 towards the end of the year.
It was a similar story for Litecoin and Ripple, both down more than 80% on recent peaks.
So where are we going on cryptocurrencies and what should traders consider as they seek to answer this question?
Draconian law on passwords
Perhaps it would be advisable to separate the different factors likely to affect cryptocurrencies in the months ahead. As events crowd in, it is too easy to see them all as being connected, forming one undifferentiated “happening”, that may prove good or bad for cryptocurrencies and those who trade them.
In fact, they are quite separate and ought to be considered as such.
First, there are issues to do with law and regulation. These do not exclusively involve proposals for tighter supervision of cryptocurrencies, as we shall see. But in general, the trend has seemed to be in this direction, and those who trade and invest in cryptocurrencies are understandably nervous.
In the US, the Securities and Exchange Commission (SEC), the regulator of financial markets, has a 100% record of refusing to licence a Bitcoin exchange-traded fund (ETF). ETFs are investment vehicles that trade on markets in a similar way to company shares.
Volatility and the possibility of price manipulation to the detriment of investors were the reasons given for the SEC’s decision.
In the UK, MPs on the Treasury Committee have described cryptocurrencies as “Wild West” assets badly in need of regulation by the British regulator, the Financial Conduct Authority (FCA).
On the other side of the world, New Zealand has proposed perhaps the most draconian action facing cryptocurrency traders and investors. So-called “digital strip searches” by customs officials would require travellers to disclose their passwords to electronic devices or face a fine of NZ$5,000.
As the Bitcoin News website put it, the development “has been greeted with particular alarm by Bitcoiners, who have particular reason to prize their privacy”.
How many currencies will survive?
So yes, those who trade in cryptocurrencies need to be aware of a move towards stricter regulation. But there are also developments in the other direction.
Take the SEC. It has opened consultation on allowing a Bitcoin ETF to be launched and has asked for comments, for and against, a clear sign of a softening of its stance.
In Britain, the FCA noted the Treasury Committee report but simply reiterated that cryptocurrencies were unsuitable for inexperienced investors and that anyone involved in the market should be prepared to lose all their money.
The FCA is renowned internationally as a regulator that encourages financial innovation and it would seem this is a reputation it wishes to keep.
Most are obscure and unlikely to be accepted as a medium of exchange. But even among the better-known brands of digital money, how many are realistically going to survive the next six or 12 months?
To take one example, Multicoin Capital, the cryptocurrency hedge fund, declared in September 2018 that Litecoin was “significantly overvalued” and that it would face significant selling pressure in the near future. Cryptocurrencies, said Multicoin, need a unique development roadmap if they are to survive, and Litecoin does not.
Beyond the problems of one cryptocurrency, the more general issue is how many cryptocurrencies is the market likely to support? Digital money may not lend itself to a natural monopoly, but it is likely to undergo a period of marked consolidation.
A question of value
In parallel, central banks and the computer giant IBM are among the mainstream institutions that have expressed an interest in launching their own cryptocurrencies. This may seem to contradict the suggestion of consolidation, but it may, in fact, encourage it, as cryptocurrencies carrying the imprimatur of such institutions could force the weaker brands of cyber money out of business.
All of which leads to the question of the likely value of cryptocurrencies in the months ahead. This is impossible to predict, of course, given that anyone who could do so would be too busy making money to share their forecasts.
Cryptocurrency trading has never been for the fainthearted and shows no signs of becoming so any time soon. But with careful consideration of all the relevant factors, it can be rewarding.