Cryptocurrencies – Where Are We Now?
Let’s rewind back to 2017 when cryptocurrencies, led by Bitcoin, were soaring in value. Bitcoin(BTC) peaked in December 2017 at over $19,000 USD, when it started the year at just $1,017. That’s a return of over 1660%. Ethereum(ETH) fared even better, rising over 10,400% during those 12 months!
How have things developed over the past couple of years?
Read on to find out…
For those of you that were marooned on a desert island for the past few years let me bring you up to speed.
Cryptocurrencies, or virtual currencies, are digital means of exchange created and used by private individuals or groups. Because most cryptocurrencies aren’t regulated by national governments, they’re considered alternative currencies – mediums of financial exchange that exist outside the bounds of state monetary policy.
Bitcoin is widely regarded as the first modern cryptocurrency – the first publicly used means of exchange to combine decentralized control, user anonymity, record-keeping via a blockchain, and built-in scarcity. Though few cryptocurrencies other than Bitcoin are widely accepted for merchant payments, increasingly active exchanges allow holders to exchange them for Bitcoin or fiat currencies – providing critical liquidity and flexibility.
The Crypto Craze of 2017/2018
In January 2017 1 Bitcoin was worth around $1,000 but by December that same year it was worth just over $19,000. However by the middle of December 2018 it had fallen to under $4,000 a plunge of over 78% percent bigger than the Dotcom bubble.
Some people had made millions whilst others had lost their life savings.
As of today it sits a little just over $9,000 per Bitcoin.
Ethereum followed the same pattern the next year with a fall from January 2018 at $1,396 to a low of $84 by December 2018 a fall of more than 93% and today it sits at around $183 per coin.
People likened it to the Tulip Mania bubble during the 17th century and when everybody from the Uber driver to your personal trainer was talking about it you knew it was far too late to get in.
So it had a monumental growth spurt and then a dramatic crash and there of course have been stories of fraud and deception of the highest order especially relating to Onecoin and Ruja Ignatova – https://www.bbc.com/news/stories-50435014
They are Hardwired for Scarcity
The source code specifies how many units can ever exist. In this way, cryptocurrencies are more like precious metals than fiat currencies. Like precious metals, they may offer inflation protection unavailable to fiat currency users.
Harder for Governments to Exact Financial Retribution
Unlike central bank-backed fiat currencies, cryptocurrencies are virtually immune from authoritarian caprice. Cryptocurrency funds and transaction records are stored in numerous locations around the world, rendering state control – even assuming international cooperation – highly impractical.
Reduces Costs of Card Payments
Cryptocurrencies’ security features also eliminate the need for a third-party payment processor – such as Visa or PayPal – to authenticate and verify every electronic financial transaction. Cryptocurrency transaction fees are generally less than 1% of the transaction value, versus 1.5% to 3% for credit card payment processors and PayPal.
Cheaper International Transactions
Transactions are either free or come with a nominal transaction fee, no matter where the sender and recipient are located. This is a huge advantage relative to international transactions involving fiat currency, which almost always have some special fees that don’t apply to domestic transactions
Governments have also included a raft of other measures to support their economies more broadly, as well as giving them flexibility to respond to changing circumstances without needing further legislation.
Lack of Regulation Facilitates Black Market Activity
Probably the biggest drawback and regulatory concern around cryptocurrency is its ability to facilitate illicit activity. Many grey and black market online transactions are denominated in Bitcoin and other cryptocurrencies.
Since cryptocurrencies aren’t regulated by national governments and usually exist outside their direct control, they naturally attract tax evaders. Many small employers pay employees in bitcoin and other cryptocurrencies to avoid liability for payroll taxes and help their workers avoid income tax liability, while online sellers often accept cryptocurrencies to avoid sales and income tax liability.
Potential for High Price Volatility and Manipulation
Many cryptocurrencies have relatively few outstanding units concentrated in a handful of individuals’ (often the currencies’ creators and close associates) hands. These holders effectively control these currencies’ supplies, making them susceptible to wild value swings and outright manipulation – similar to thinly traded penny stocks
Limited to No Facility for Chargebacks or Refunds
Although cryptocurrency miners serve as quasi-intermediaries for cryptocurrency transactions, they’re not responsible for arbitrating disputes between transacting parties. This means that you have no one to appeal to if you’re cheated in a cryptocurrency transaction – for instance, paying upfront for an item you never receive. By contrast, traditional payment processors and credit card networks such as Visa, MasterCard, and PayPal often step in to resolve buyer-seller disputes.
Cryptocurrency is an exciting concept with the power to fundamentally alter global finance for the better. But while it’s based on sound, democratic principles, cryptocurrency remains a technological and practical work in progress. For the foreseeable future, nation-states’ near-monopoly on currency production and monetary policy appears secure.
Any claims that a particular cryptocurrency confers total anonymity or immunity from legal accountability are worthy of deep scepticism, as are claims that individual cryptocurrencies represent fool proof investment opportunities or inflation hedges. After all, gold is often touted as the ultimate inflation hedge, yet it’s still subject to wild volatility – more so than many first-world fiat currencies.
If you are worried about your current portfolio holdings or would like more information on possible investment opportunities at this time you can take advantage of my free 60-minute consultation by clicking Contact Me Today for an initial informal chat.
I would be happy to review your current financial plan, offer some tips for creating one or answer any questions you might have pertaining to your investments.
About the author
Colin MacGregor is an independent financial advisor with over 10 years experience in the advisory sector and has been based in Prague, Czech Republic since 2009.