JOHANNESBURG – Early in August last year I published an article Cryptocurrencies: the burst bubble – what lies ahead? In this paper. Since then Bitcoin lost 54 percent in value, Ethereum lost 72 percent, Monero 62 percent and the Crypto Top 10 Index is down by 56 percent. Surely, they must offer value again?
I compared the burst cryptocurrency bubble with the four famous bubbles in history – the South Seas Bubble in 1720, the Standards & Poor’s Composite index in 1929, the tech stocks bubble in 2000 and the global financial crisis in 2008 that was induced by subprime lending and the demise of Lehman in 2008. I used China’s Shanghai index as a proxy over the given period.
My conclusion was that the tech stocks bubble in 2000 was probably the most relevant due to the technical nature of cryptocurrencies.
So far the Bitcoin exchange rate continued to track the timing and duration of the 1929, 2000 and 2008 bubbles pre and post the burst of the bubble over the past 25 months.
The big question is how the price trends of cryptocurrencies will develop over the next six months? The durations of the price declines after the bubbles burst in 1929 and 2008 were very similar as prices bottomed 15 and 13 months respectively after the highs. After the tech bubble was pricked in 2000 the Nasdaq index steadied after 13 months but resumed its fall four months later and fell by another 32% over the next two months and the price decline continued for the ensuing 11 months.
The durations of the falls after the 1929 and 2008 crashes until prices bottomed can be explained from a macroeconomic view as economic stimulation came into play. It was different In the case of the tech bubble in 2000, though, as most of the valuations were based on hype and hot air only and reality took it down to levels where the investments offered value again.
I have to remind myself time and time again how cryptocurrencies such as Bitcoin are created and how the market works. According to the European Parliament’s Committee on Economic and Monetary Affairs. “The Bitcoin system functions according to a set of rules known as the Bitcoin Protocol. When person A wants to pay a certain amount of bitcoins to person B, payment instruction is placed in the system, along with other payment instructions. Miners validate payments and record them in a newly created block by solving a computationally demanding mathematical problem that is created and specified by the Bitcoin Protocol. Miners get compensation for their services in two forms: fees and freshly minted bitcoins that are created in the process of validating the transactions. Miners compete with each other, as the compensation is paid to the first miner that solves the problem, meaning that the system favours miners with the strongest computational power.”
Cryptocurrencies are no more than pseudo or artificial money
It is clear to me that cryptocurrencies are no more than pseudo or artificial money as it not legal tender and backed by any central bank or any financial or tangible assets and could be open for abuse. I, therefore, support the Intergovernmental FinTech Working Group (IFWG) and Crypto Assets Regulatory Working Group’s objectives for a crypto assets regulatory framework to:
“a. Ensure the safety and efficiency of the financial system and financial institutions.
b. Ensure consumer and investor protection.
c. Minimise opportunities for regulatory arbitrage.
d. Combat the circumvention of exchange control rules and regulations.
e. Combat illicit financial flows, money laundering and the financing of terrorism.
f. Combat tax evasion and impermissible tax avoidance arrangements.
g. Support financial inclusion efforts and the advancement of technological innovation in a responsible and balanced manner.”
The cryptocurrency market reminds me of the tech bubble that was built on hot air and speculation up to March 2000. It went up in a puff of smoke and caused many hardships. Before the speculation or shall I say, investment, in cryptocurrencies such as Bitcoin took off in earnest in 2017, one Bitcoin could roughly purchase one fine ounce of gold. At the height of the feeding frenzy in December 2017 one Bitcoin was worth up to 15 ounces of gold but will only buy a maximum of three ounces today. Yes, a lot of people got burnt in the process – so much so that they will shy the market for a long time.
I do, however, think that crypto currencies and assets are there to stay. I am still old school and in the case of cryptocurrencies I need to beware because I do not know what realistic prices to pay for them. The duration and development of the value destruction after the 2000 tech bubble burst continues to spook me.
Ryk de Klerk is an independent analyst. Contact [email protected]). His views expressed above are his own. You should consult your broker and/or investment advisor for advice.