Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Thursday, 4 January 2018

#ICYMI: Crytocurrency movements/trends observation and explanation

Just a few days into the New Year of 2018, I think it would be apt to review the movements in the cryptocurrency market in 2017. After all, the buzzword for 2017 was "Cryptocurency". A self-proclaimed "early adopter" of cryptocurrency where I started mining for Bitcoin before it became cool, cryptocurrency has reached new hypes where more people are entering and identifying themselves as "experts and fanatics" of cryptocurrencies or Blockchain technology. Effectively, all "moms and pops" are now entering the market in search of easy riches (note this sentence).

There have been several major movements in the cryptocurrency markets in 2017. Bitcoin shot through the roof where it reached a price tag of USD$20,000, giving an amazing return for its believers. There was also a major correction to nearly USD$10,000 where people are speculating whether the bubble for cryptocurrencies has burst. Just a few days ago, Ripple (XRP) has increased by more than 1000% in the past month. It has also replaced Ethereum as the second most valuable cryptocurrency based on market capitalisation, after Bitcoin. While Bitcoin became an obscurity, Ripple news are now all over the internet.

However, similar to all asset bubbles that are identified in history (retrospectively), a common symptom was the overvaluation and excessive confidence in the asset that made investors believe that the asset prices will only keep increasing. Referring to the previous statement where everyone was jumping onto the cryptocurrency bandwagon, is this scene replaying itself in another form or cryptocurrencies are inherently worth the price tags?

I believe this question is a huge one for anyone that wants to determine whether to invest in cryptocurrencies. As any investor, one needs to determine the real value of any assets based on assumptions, be it future cashflows or underlying asset valuations. One problem of cryptocurrencies is that they do not have these components to be valued. I do agree with Mr Damodaran's classification of cryptocurrencies as currencies instead of assets (duh, hence the name) (you can read more here: http://aswathdamodaran.blogspot.com/2017/10/bitcoin-backlash-back-to-drawing-board.html). Then how else can we value cryptocurrencies or even attempt to value them?

One convenient way could be modelling fiat currencies with cryptocurrencies, assuming that they are going to convey the similar valuation concepts with identical functionalities. With all forms of fiat currencies, a big component of valuation is trust and number of users adopting the currency. Just referencing to the US dollar (basically because the greenback is the most widely adopted currency), we can see these 2 components being incorporated. Negative news of the country's economic performance or countries abandoning its USD-based reserves trigger devaluation of the currency. Even identifying all components, it is extremely difficult to identify a single valuation for fiat currencies. More commonly so, price tags are all based off market demand and supply pressures from investor expectations as a reflection of the major market movements. Cryptocurrencies also seem to react on these factors where Ripple has been surging as Coinbase, a major cryptocurrency exchange, is considering adding it to its platform, opening access to a wider audience. This essentially increases the number of users adopting Ripple.

Offering my "2-cents" opinions, I do believe the cryptocurrency market is moving towards overvaluation as we have yet to see the implementation of its proclaimed functionalities and remove key cost barriers that are present in traditional banking systems. Even so, there are examples of inefficiencies and problems arising from its volatile prices. One of such is Steam, a gaming platform behemoth, removing Bitcoin as one of its payment methods citing reasons of high transaction costs.

The symptoms where people are turning to cryptocurrencies as a quick way to riches are also worrying. Loads of institutional and retail investments are been thrown into "alt-coins" and Initial Coin Offerings are now the norm. Without regulations, such incidents are likely to increase risks, adding instability to the market.

While this post is not to demerit the advantages of blockchain technology and the promises of cryptocurrency, I believe the media hype and market speculation is likely to derail the market where the community is looking at it for pure profits rather to improve it to benefit the society. Only time will tell whether this is to be true or not..

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

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2 comments:

  1. do you know where i can trade cryptocurrency futures here in SG ? I heard it is available but have not find any thus far. Any help appreciated. Thanks

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    1. Hi Mr Chua,

      I am not entirely sure of whether there is cryptocurrency futures here in SG but there are a lot of CFD platforms that allow trading on cryptocurrencies. They are limited to major cryptocurrencies though. You can check out IG Markets.

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