Cryptocurrencies: For The Turnstiles?

Cryptocurrencies have experienced a torrid start to 2018. The euphoria that characterized much of the prior year has, in some cases, given way to panic, wiping as much as $400bn off of the sector’s collective market cap. What is next for the sector and, in particular, how does recent volatility effect our outlook and the FBT Bitcoin Trust?

Most observers cite recent comments from South Korea and China threatening to restrict or ban crypto currency trading as the catalyst for sector weakness. News late last year that South Korea intended to ban cryptocurrency trading rattled markets but Seoul subsequently played down these reports and markets regained their composure. Earlier this week, however, the South Korean finance minister returned to the theme, saying that shutting down cryptocurrency exchanges was still an option but that “serious discussion” was required first. China’s position on cryptocurrencies has also churned markets when, for example, it banned cryptocurrency exchanges in 2017. The latest suggestion that Beijing is considering blocking access to domestic and overseas trading platforms has again fueled negative sentiments.

Headlines such as these, coming hard on the heels of MSM coverage citing enormous gains enjoyed by those exposed to cryptocurrencies, have likely spooked “hot” money and those with little experience of trading this sector, contributing to selling pressure. When the market turns, the bottleneck created by a simultaneous rush for the turnstiles is exacerbated as fear replaces greed, driving prices lower. These price movements should remind us that day trading cryptocurrencies is not a game for the uninitiated or faint-hearted.

It is important however to keep these developments in context: bitcoin is now trading at levels that were all time highs only 6 weeks ago. Those searching bitcoin’s trading history for comfort will note that, in each of the last three years, bitcoin has hit its annual low in mid-January. That is not to say bitcoin can’t/won’t go lower – it can and it may. But while bitcoin’s history of volatility is well documented, so too is its resilience. Precipitous declines have occurred in the past and bitcoin in particular has always recovered. Investors may take some comfort in recalling the adage that, though history does not always repeat itself, it does often rhyme.

So where does this leave market participants? Predicting short term trading swings is generally a mug’s game, one best left to those who are immersed in the sector. That is one reason we established the FBC Bitcoin Trust as a buy and hold vehicle rather than a platform to speculate on price direction or momentum. We still feel this is the right way for most to play the market. Despite the volatility of the past few days, our view is unchanged: bitcoin fundamentals remain sound and those prepared to take a longer-term perspective and weather this recent tumult should be well positioned to benefit from positive developments such as the growth of side chains and the introduction of the Lightning Network potentially coming later this year.