Bitcoin’s wild trip fails to shake cryptocurrency believers
“I feel the exact same about my crypto investments at a $20k price as I did about it at a $6,500 price,” he says. “I am a long-term holder and believe bitcoin will survive this turbulence.”
Bitcoin’s surge from less than $1,000 at the start of last year to almost $20,000 by its end drew a chorus of warnings from regulators, saw attempts by Wall Street institutions to muscle in on the financial frenzy and prompted publicly traded companies to shamelessly ride the wave to quick riches by incorporating crypto or blockchain into their names.
Almost two months since the bitcoin price touched a record high, the return of volatility to the US stock market has overshadowed the fact that the controversial cryptocurrency has hauled itself off the floor and is now trading at $10,000.
The bitcoin price has raced up only to crash before, notably in 2013 when it soared from $12 to $1,000, before losing more than half that gain. Mr Weiss’s apparent serenity comes, he says, from his confidence that blockchain, the distributed ledger technology underlying bitcoin, represents an important innovation. Companies in industries from finance to shipping say they are testing out blockchain.
The connection between a sweeping technological change and financial speculation is common, explains Christian Catalini, founder of MIT’s Cryptoeconomics Lab. “It’s not unusual for periods of speculation to be driven by technological change,” he says, pointing to the dotcom boom.
While conviction that blockchain will ultimately deserve a chapter in the history of technological innovation stiffens the resolve of some who have put money into bitcoin, the mania of the last two months has also provided painful lessons.
For example Coinbase, America’s biggest and best-known cryptocurrency exchange, has infuriated scores of customers because of system issues that have affected the speed at which money is withdrawn from the exchange, according to interviews with users and complaints made to regulators in Washington and Texas seen by the Financial Times.
Coinbase has vowed to improve its customer services and last month hired an ex-Twitter executive to bolster its efforts.
Although the wild swings in bitcoin have enticed established high-frequency trading firms starved, until recently, of volatility in financial markets, they have been exacerbated by a lack of trading infrastructure that experts say makes crypto trading more dangerous for retail investors.
“There is by definition very little transparency in this market,” cautions Luigi Zingales, finance professor at Chicago Booth School of Business, “and a very small volume can change and affect the prices.”
In contrast to retail investors who speculate on stocks — and have fundamental reference points such as cash flows and earnings — the trading of bitcoin and cryptocurrencies happens in something close to an information vacuum. Mr Weiss admits that information is scarce. “To get the most cutting-edge information you have to be on a Reddit page or listen in to the conversation of people who are involved.”
Online chat forums have become echo chambers where coin evangelists cheer each other on and deride rival tokens. That dearth of information leads people to “look for social proof” and encourages “herding behaviour”, says Marina Niessner, assistant professor of finance at the Yale School of Management.
“If these people, even if it’s a bot, reflects back what you’ve been thinking, then people will follow,” she says.
And an explosion in the issuance of alternative coins, driven by entrepreneurs using a barely regulated crowdfunding fundraising mechanism called initial coin offerings to fund their projects, has given those who are tempted a large crypto universe to pick from.
The alternative-coin markets are prone to misinformation and market manipulation, with news circulating online, true or fake, affecting prices. A viral hoax on messaging board 4Chan for example, falsely reporting the death of the ethereum cryptocurrency’s inventor, wiped some $4bn off ethereum’s market value last June.
Cryptocurrency markets were so febrile by late last year that some longer-term investors backed off. Spencer Bogart, a partner at San Francisco-based Blockchain Capital, a venture capital firm founded in 2013, described the market conditions as “alarming”. Mr Bogart spotted a “unit bias” — coins priced below $1 were proving popular with buyers, regardless of their investment potential.
Take Dentacoin, a token planned to help provide dental services on a blockchain. Dentacoins are worth a fraction of a cent, but on January 8 the market capitalisation of their circulating supply was briefly over $2bn (it’s now $288m). Such Dentacoin buyers were an “indication that the investment sophistication in broader crypto markets had reached dangerously low levels”, says Mr Bogart.
That is likely to only add to the speculation, raising the prospect of further wild swings in crypto land. None of which matters for those retail investors who say they are in bitcoin for the long term.