Bitcoin’s 2018 fall is no bad news for cryptos

Jinoy Jose P | Updated on December 31, 2018

The crash is powered more by a long-pending correction and the curbs introduced by countries such as China

If you compare the dollar value of the bitcoin today with the same day a year ago, you can easily say the digital currency has become small change.

As on December 27, one bitcoin values $3,585, against $15,189 a year ago. That’s a fall of more than 76 per cent in just one year. Ever since January this year, the cryptocurrency has been plummeting after witnessing one of its best rallies in 2017 where at one happy moment it had reached a value of nearly $20,000 on the CoinDesk Bitcoin Price Index. In 2017, almost everyone seemed bullish about the future of the bitcoin, so much so that investors termed it “digital gold” and the finest financial product of the century.

But the sceptics didn’t buy into that. JP Morgan’s Jamie Dimon famously said the cryptocurrency was only fit for use by drug dealers, murderers and people living in North Korea.

Evidently, opinion on cryptocurrencies in general and the bitcoin in particular have always been sharply divided and as in many such cases the reality lies in between. Inarguably, the bitcoin — created by anonymous computer scientist(s) Satoshi Nakamoto — is the most innovative and influential fintech product of the century, whose success and the ace technology that powers it — blockchain — has triggered a series of similar innovations and inventions along with a heated global debate on the role of fiat currencies and the central banks that have failed to keep their manipulations under check.

Why the fall

In fact it was bitcoin’s success that prompted financial institutions and governments — which often ridiculed the currency for its anarchic and centralisation-agnostic characteristics — to look at the potential of digital currencies. Some of the world’s big banks went a step ahead and introduced their own digital currencies in lieu of the bitcoin and tried to tap the potential of the blockchain technology (which is basically an online public ledger system that allows digital information to be distributed but not copied).

Indeed, the secrecy shrouding the creation and introduction of bitcoin, at least in the initial years, had created an aura around the product and its many clones that followed — from Ethereum and Litecoin to the Bitcoin Private, which came out in 2018 — and the ensuing hype propelled the sudden spike in the value of cryptocurrencies. The global financial crisis — as a response to which Nakamoto reportedly created the bitcoin — and the way the public at large was losing trust in traditional currencies and asset classes, also helped the bitcoin in its upward journey, beating the expectations of its own apostles and outsmarting cynical investors.

Now, just as the currency celebrates its 10th birthday (bitcoin was conceptualised in October 2008 and launched in 2009), does its plummeting value signal doom for the cyrptocurrency? The web is awash with with apocalyptic predictions on the future of bitcoins and several investors, hedge fund managers, and even geeks are already writing the obituary of the bitcoin. However, there are still many reasons to feel bullish about the bitcoin and other crypto currencies.

For one, the so-called “bitcoin bubble” of 2017 was going to meet its moment of correction as was evident. Like in the case of gold, most investors consider the bitcoin as an alternative asset which they want to visit when their Plan A option bombs. It would take a long time for the cryptocurrency — which doesn’t have any patrons in the form of a central bank or a government or even a financial institution of some repute -- to gain that level of maturity and confidence and enter the mainstream financial discourse.

Gaining maturity

The existing fiat currencies have historically gone through many episodes of corrections and convulsions before they have gained the trust they enjoy now. Still, they are susceptible to third-party manipulations and government tweaks (as China has illustrated with its doctoring of the Renminbi). Bitcoin, in spite of the fact that it is an open will have to go through many such grinds before it takes a clear shape. And any sane crypto investor will be patient enough to see that happen and, surely, will put the bear hug to good use.

Another interesting as well as important factor that would help bitcoin and cryptos going ahead is the emerging formations in geopolitics. As the US, under Donald Trump, keeps spooking global markets with measures such as the tariff hikes on Chinese imports and the way China has been responding to it are potent enough to create situations in 2019 where both the dollar and the Yuan could face turbulence.

Considering that several economists and financial market analysts are already saying the next financial meltdown is closer than we all think, and there is a currency crash looming in the horizon, it is just a matter of time smart investors with good surplus monies would be scrambling for alternative forms of assets and cryptos, for sure, will fit the bill easily.

In sum, as Allianz chief economic advisor and influential Egyptian American businessman Mohamed El-Erian put it recently, cryptocurrencies will “become more and more widespread”, even though they would not be dominant. El-Erian wants to treat cryptos as commodities — not currencies. That’s a more sensible way to look at the products rather than being utterly nihilistic about one of the most innovative inventions in the history of finance.

Published on December 31, 2018

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