Considering hopping on the cryptocurrency rollercoaster?

You might want to think twice…

If you followed bitcoin's progress in 2017, you'll know it was similar to riding a particularly nerve-shredding rollercoaster. Starting off the year as low as $750, its price exploded to over $17,000 in less than 12 months (all figures $US).1

When bitcoin was first introduced, back in 2009, it was a completely unregulated international payment network with transactions carried out directly between buyer and seller, with no intermediary. It was designed to be a simpler, cheaper way of exchanging money, particularly across borders.

Since its meteoric rise, it has been used less as an international currency and more as a speculative means to increase capital.

However, do bitcoin and its many imitators represent a good investment opportunity?

A wild ride

Bitcoin's many opponents point to the complete lack of regulation (and investor protection) that the currency offers, along with its volatility.

Even if you only look at its price during 2017, the ups and downs have been remarkable. It stood at only $750 in January but grew to $5,000 in early September. After China banned the trading of cryptocurrencies, bitcoin's price fell to $2,900, only to bounce back and push well beyond that threshold.2

The naysayers

Financial experts have lined up to offer doom-laden opinions on cryptocurrencies. Jamie Dimon, CEO of JPMorgan Chase, labelled bitcoin a "fraud," saying, "It's worse than tulip bulbs. It won't end well." Veteran investor Howard Marks called it a "pyramid scheme."

Jack Bogle, founder of the Vanguard Group, advised, "Avoid bitcoin like the plague. Bitcoin has no underlying rate of return. There is nothing to support bitcoin except the hope that you will sell it to someone for more than you paid for it."3 Digital currencies are not underpinned by a central bank.

Neil Wilson, senior market analyst at ETX Capital, agreed. “Rather than a commodity or currency, bitcoin is like owning stock in a company that will… never pay a penny in dividends," he said. “The only way it has value is if the next guy is willing to pay you more for it—the greater fool."4

Governments aren't fans either, in light of growing concerns that digital currencies are being used for money laundering and tax evasion. China has banned cryptocurrencies5, and the UK and EU governments announced measures in late 2017 to regulate their use.6

Venezuelan police have arrested bitcoin miners, the people who verify bitcoin transactions. 7 However, the dysfunctional Venezuelan government, whose traditional currency has fallen sharply in value, ended 2017 by announcing it would launch its own cryptocurrency, the 'petro,' backed by the country's oil reserves.8

There are also concerns over the security of holding cryptocurrencies. In 2016, 120,000 bitcoin were stolen from Bitfinex, a Hong Kong-based cryptocurrency exchange.9

None of this, however, has done much to silence the crypto cheerleaders.

Bringing bitcoin to the masses

While individuals have been trading bitcoin since its inception, some financial institutions are beginning to experiment with bitcoin derivatives, which is lending greater legitimacy to the cryptocurrency arena.

LedgerX, an institutional trading and clearing platform, began trading bitcoin options in October, 2017.10 In the same month, the Chicago Mercantile Exchange (CME) announced the launch of bitcoin futures for mid-December.11 Nasdaq is planning on launching bitcoin futures in early 2018.12

Morningstar's Ben Johnson states, "If bitcoin futures see the light of day, then I'd expect a slew of filings for futures-based ETFs."13

There's no denying the enthusiasm in the market for cryptocurrencies &mdash but right now, there is no assurance that investors can avoid falling victim to a potentially giant speculative bubble.

Blockchain &mdash the tech behind the cryptocurrency craze

The technology behind bitcoin and other cryptocurrencies &mdash blockchain, or distributed-ledger technology &mdash is considered a game changer, with many potential applications.

Part of its appeal is the way data is stored across the blockchain network, rather than in one central, vulnerable location. The ability for users to make transactions directly with one another &mdash cutting out the need for an intermediary &mdash is another major benefit.

JPMorgan Chase, Microsoft, Intel, Credit Suisse, and Thomson Reuters are investing in the technology behind cryptocurrency Ethereum.14

IBM's blockchain initiative has carried out supply-chain trials with Wal-Mart.15 Toyota is using blockchain technology to develop driverless cars.16

There is also a host of companies offering blockchain solutions trading on the stock market, such as Riot Blockchain, Coinsilium Group, HIVE Blockchain, BTL Group and 360 Blockchain. Their market caps range from $30-814 million.17 (This list of companies is for illustrative purposes only and is not an investment recommendation. Be sure to do your homework, and assess the risks, before considering an investment in any of these firms.)

According to Fidelity Labs SVP Hadley Stern, "Blockchain technology will change the world." Stern likened bitcoin to the Napster of blockchain technology. It's the first of its kind, but the next innovations will be better.18

Even if it turns out, as some predict, that the cryptocurrency bubble bursts, the technology behind it is evolving quickly and appears to be here to stay. It’s set to be an interesting ride.

Please note that any companies, stocks, funds or ETFs mentioned in this article are for reference only and are not investment recommendations.

 

Please note that any companies, stocks, funds or ETFs mentioned in this article are for reference only and are not investment recommendations.

  1. CNBC. "Bitcoin futures now up 20% during first day of trading as the close approaches." https://www.cnbc.com/2017/12/10/bitcoin-futures-set-to-trade-on-cboe-sunday-evening.html (Accessed December 11, 2017).
  2. CNBC. "This chart shows bitcoin's meteoric rise over the last 6 years." https://www.cnbc.com/2017/11/29/this-chart-show-bitcoins-meteoric-rise-over-the-last-6-years.html?recirc=taboolainternal (Accessed November 29, 2017).
  3. CNBC. "Bitcoin passes $11,000 but Jack Bogle still says avoid it 'like the plague'." https://www.cnbc.com/2017/11/29/bitcoin-passes-11000-but-jack-bogle-says-avoid-it-like-the-plague.html?recirc=taboolainternal (Accessed November 30, 2017).
  4. The Guardian. "Bitcoin nears $10,000 mark as hedge funds plough in." https://www.theguardian.com/technology/2017/nov/27/bitcoin-nears-10000-dollar-mark-as-hedge-funds-plough-in (Accessed November 29, 2017).
  5. The Guardian. "Bitcoin value plummets after China orders trading in currency to cease." https://www.theguardian.com/technology/2017/sep/15/bitcoin-value-plummets-after-china-orders-trading-in-currency-to-cease (Accessed December 5, 2017).
  6. The Guardian. "Bitcoin: UK and EU plan crackdown amid crime and tax evasion fears." https://www.theguardian.com/technology/2017/dec/04/bitcoin-uk-eu-plan-cryptocurrency-price-traders-anonymity (Accessed December 4, 2017).
  7. CNBC. "This is one of the world's most dangerous places to mine bitcoin." https://www.cnbc.com/2017/08/30/venezuela-is-one-of-the-worlds-most-dangerous-places-to-mine-bitcoin.html (Accessed November 29, 2017).
  8. Reuters. "Enter the 'petro': Venezuela to launch oil-backed cryptocurrency." https://www.reuters.com/article/us-venezuela-economy/enter-the-petro-venezuela-to-launch-oil-backed-cryptocurrency-idUSKBN1DX0SQ (Accessed December 4, 2017).
  9. The Guardian. "Will bitcoin ever be a safe investment or always a gamble?" https://www.theguardian.com/money/2017/oct/01/will-bitcoin-ever-be-safe-investment-gamble (Accessed November 29, 2017).
  10. Yahoo Finance. "Why Nasdaq, CME, CBOE all want in on bitcoin futures." https://finance.yahoo.com/news/nasdaq-cme-cboe-want-bitcoin-futures-183256191.html (Accessed December 7, 2017).
  11. CNBC. "CME to launch bitcoin futures in three weeks after green light from regulator; bitcoin jumps." https://www.cnbc.com/2017/12/01/cme-says-its-launching-bitcoin-futures-on-dec-18.html (Accessed November 29, 2017).
  12. Bloomberg. "Nasdaq Plans to Introduce Bitcoin Futures." https://www.bloomberg.com/news/articles/2017-11-29/nasdaq-is-said-to-plan-bitcoin-futures-joining-biggest-rivals (Accessed November 29, 2017).
  13. CNBC. "The next step for bitcoin is ETFs." https://www.cnbc.com/2017/11/29/the-next-step-for-bitcoin-is-etfs.html (Accessed November 29, 2017).
  14. Fortune. "Big Business Giants From Microsoft to J.P. Morgan Are Getting Behind Ethereum." http://fortune.com/2017/02/28/ethereum-jpmorgan-microsoft-alliance/ (Accessed November 29, 2017).
  15. Fortune. "Walmart and 9 Food Giants Team Up on IBM Blockchain Plans." http://fortune.com/2017/08/22/walmart-blockchain-ibm-food-nestle-unilever-tyson-dole/ (Accessed November 29, 2017).
  16. Fortune. "Toyota, Tech Firms Explore Blockchain For Driverless Cars." http://fortune.com/2017/05/22/toyota-mit-blockchain-driverless-cars/ (Accessed December 5, 2017).
  17. Investing News. "11 Blockchain Technology Stocks." https://investingnews.com/daily/tech-investing/blockchain-investing/blockchain-technology-stocks/ (Accessed November 29, 2017).
  18. CNBC. "Blockchain technology will change the world': Fidelity Labs SVP." https://www.cnbc.com/2017/08/11/blockchain-technology-will-change-the-world-fidelity-labs-svp.html (Accessed November 29, 2017).