You are here
Peering into the crypto ball
LAST YEAR can be remembered for many things. One of the more interesting developments from an investment perspective is the rapid growth of interest in cryptocurrencies and digital tokens. In January 2017, a bitcoin was worth around US$1,000 and the phrase "initial coin offering" (ICO) was virtually unknown. Fast forward to the start of 2018 and the value of bitcoin has gone up nearly twenty-fold. If you have not invested in an ICO by now, you are likely to be upstaged at the next dinner party.
In the spirit of sheer speculation, set out below are my top predictions for what may be in store this year.
01. Your friends are going to buy some ether
Much of the rapid price growth in cryptocurrencies can be attributed to an influx of new investors. There is no sign that the flow of new money into this space is going to abate. Institutional money has not yet arrived in full force, and it is still the case that the typical crypto-investor is your average professional wagering a little bit of their surplus cashflow on the possibility of making an outsized gain. This is one part entertainment and one part investment. Anecdotally, it would seem that the pool of investors is widening as early adopters are happy to talk about their successes to friends and family.
02. The average investor still will not read a whitepaper
To many investors, an ICO whitepaper is like the words of wisdom in a fortune cookie. Individually, the words make sense, but in combination, the wisdom can sometimes be lost. Whitepapers set out the roadmap for a blockchain project but the technical specifications can be hard to understand if you are not conversant in this space. It is a steep learning curve to understand the differences between the various consensus algorithms, why atomic swaps are a good thing, or recognise that child chains are not as nasty as they sound. Some of the more recent price movements are suggestive of a flock mentality, which is the most dangerous form of speculation – the dreaded fear of missing out, and not how Warren Buffet would invest.
03. Some will launch, some will fail
The number of ICOs really started to pick up in the first part of 2017. For the earlier of these new projects, this year should bring about the delivery of some project milestones. This is the real test of the capability of a development team – can they actually do what they say they can? And can they do it on time? Slippage in project milestones will inevitably occur for some of the more ambitious projects and that is generally okay. However, for others, it will become clear that the initial sugar high of an ICO has worn off and that the project will not be brought to fruition.
04. Altcoins will rise?
This is a bold prediction and not entirely my own. The theory here is that bitcoin and ethereum are like starter cryptocurrencies. They are relative blue chips but once you have some ether in your wallet, it is very tempting to invest into earlier stage projects or ICOs where there is a chance of catching the initial price rise or "pump" as it is known.
The other factor in play is that the technology behind the earlier blockchain projects is starting to look a bit old, though in fairness, there are plans for improvements to be made. We have already started to see investor interest in newer and well-funded competitors, which are based on a different architecture and have been designed from a blank piece of paper. The analogy can be drawn with Internet companies where some of the first movers were usurped by more innovative competitors as part of a second wave of innovation.
05. More red tape
Towards the end of 2017, regulators in different parts of the world started to express concern about ICOs and cryptocurrencies in general. The preoccupation of regulators is, however, more than just investor protection. It cuts across many areas. Money laundering and tax compliance are right up there and what I expect is more targeted and onerous regulation. It may not happen this year, but opening an account with a cryptocurrency exchange will eventually become no different from opening a depositary account with a bank in terms of proving the source of funds and meeting know-your-customer requirements.
06. More institutional money
This year, we will see the beginning of institutional money flowing into cryptocurrencies. It is already common for the pre-sale of an ICO to be gobbled up by blockchain focused funds, and this trend will continue. The prevalence of crypto-focused asset managers will increase and their coverage of the various parts of the cryptocurrency market will widen. The on-market trading of bitcoin futures was really just the start and I suspect we will see greater distribution through traditional asset management channels, together with index tracker and ETF-style products. Perhaps more significantly, small portfolio allocations to cryptocurrencies as an alternative asset class will become more acceptable to conservative investors seeking balanced returns.
07. The bulls and bears will continue to disagree
The last of my predictions for 2018 is perhaps the most obvious of all. Cryptocurrency as an asset class is a bit like a durian – people either love it or hate it. Proponents tend to evangelise about the underlying potential of distributed ledger technology and point out the absurdly high returns which have been produced by some coins in particular. The bears on the other hand, cite the extreme price volatility, the lack of intrinsic value, the overwhelming evidence of a price bubble, and the shady past of bitcoin. Like the dotcom bubble, the reality is probably somewhere in between. Even if there is a sudden correction to an overheated market, the technology is genuinely disruptive and it is exciting to see it take shape.
All views are personal. This article does not constitute financial or legal advice. The Monetary Authority of Singapore has issued an advisory for investors in cryptocurrency to invest with extreme caution.