Cryptocurrency, the Future of Money or Just a Commodity

    Ramon Small-Ferguson
    Ramon Small-Ferguson

    During the past three years, the global phenomenon that is “cryptocurrency” has caused both fascination and skepticism, as investors come to grips with the prospects for this new form of money.

    Money is any item used as a medium of exchange, and a “cryptocurrency” is a form of money, designed to be used as a medium of exchange online. A cryptocurrency simply is a digital asset or coin, with currently more than 1,000 examples available globally.

    Bitcoin Boom
    Bitcoin has remained the best known cryptocurrency with the largest market capitalisation as at July 19th 2018 (US$127.8), followed by Ethereum (US$47.1B) and Ripple (US$18.7B). Since inception, Bitcoin, the actual traded currency, has increased from zero United States dollars in value, to a peak of US$18,674 in December 2017, in less than nine years of its existence.

    This means between 2010 and 2017, investors got a compound annual return on investment of 366%. The year 2017 was the best performing one for Bitcoin, with a price return of 1360.43% relative to a 119.18% return in 2016.

    Cryptocurrency investments, such as Bitcoin, are uncertain and highly volatile. Cryptocurrency markets are extremely difficult to predict and analysis of the market is often speculative by nature.

    We have observed an increase in market volatility recently, with Bitcoin currently trading below its 200-day moving average price and it has seemingly entered what can be termed, “correction territory.”

    Year-to-date, the Bitcoin market has been bearish overall, down over 50%, with the North Korean hacking scandal and the announcement of Bitcoin futures contracts trading, placing downward pressure on prices.

    Bitcoin has had similar booms and falls since 2010, with at least three other spikes in price (each bigger than the last), followed by a significant decline and back to steadily rising prices. A similar pattern occurred between 2013 and 2015. This was still in the early stages of the cryptocurrency market when prices were gradually rising, with not many at the retail level invested (Bitcoin’s market capitalisation was less than US$10B).

    Over a three-month period, the value sky-rocketed from below US$130 in October 2013, breaking the US$1000 barrier in December 2013, rising by 630%. Following that spike, the price declined by 82.7%, to fall below US$200 by mid-January 2015. Since then, the market has expanded exponentially and there are even larger amounts of capital in the cryptocurrency market now.

    With such volatility, investment in cryptocurrency has both significant upside and downside that may not make it a practical investment for the average risk-averse individual.  Despite acceptance as a medium of exchange in some areas of the world such as Venezuela, corrections in the value of Bitcoin are likely to continue in the future. This is due to the still early stage of the development of the cryptocurrency market, making it riskier than some volatile emerging market assets.

    Is it a Bubble?
    The nature of speculation that drives the price movements has led some to deem it as not having an actual intrinsic value due to a lack of underlying assets.

    Similar to both currencies and commodities, supply and demand factors do affect the value of cryptocurrencies. Hoarders of cryptocurrency often can cause price fluctuations. On the other hand, according to Bloomberg Business Week, just 1000 people in the world own 40% of the Bitcoin market based on their total holdings of the currency. This concentration of ownership means that a small group has the ability to significantly influence or manipulate Bitcoin prices, which lessens the transparency of the market.

    Is Cryptocurrency the Future of Money?
    One can opt to trade the currency or alternatively, simply trade cryptocurrency stocks on a regular stock market. One such stock is ‘Grayscale Bitcoin Investment Trust’, an investment vehicle which gives you indirect exposure to Bitcoin currency (at a premium), without the challenges of buying, storing or safekeeping Bitcoins.

    Cryptocurrencies do not require the financial intermediation function of commercial banks. However, there still remains a long way to go before they will be able to replace traditional money.

    Online retailers such as Amazon may opt to accept cryptocurrency for their own transactions, but the acceptance of cryptocurrency is reliant on the holistic acceptance by monetary authorities and Governments.

    Whatever its form, mobile money solutions present the opportunity for safer, faster and more secure transactions. Therefore we believe that cryptocurrency and blockchain technology are here to stay.

    (Ramon Small-Ferguson is responsible for the conceptualization of strategies that guide the investment of the equivalent of over US$370 Million in assets. He holds the Chartered Financial Analyst (CFA®) designation awarded by the CFA Institute and is certified as a Financial Risk Manager (FRM®), by the Global Association of Risk Professionals)


    Connect with an advisor and start a conversation about your goals.

    Give us a call at: 876-920-1132
    Email: info@jnfunds.com

    Leave a comment

    Your email address will not be published.