Bitcoin – the oldest and bellwether cryptocurrency – closed at $3,769.91 (£2,920), according to exchange operator CoinDesk, on December 31 2018.
The cryptocurrency, along with others, had been extremely volatile throughout 2018, trading below several highs seen in the previous year.
It hit the $20,000 mark in December 2017, and experts had speculated that the price could exceed $50,000 in 2018.
Bitcoin
But 2018 proved to be a tumultuous year for cryptocurrencies, marred by severe price swings, regulatory clampdowns and volatility, with most cryptocurrencies performing poorly.
The bitcoin price index – an average of monthly prices – fell from $13,860.14 in January 2018 to $3,689.56 by December 2018, according to Statista.
Bitcoin completely met my expectations: it crashed and so did the others.Neil LiversidgeRicky Chan, director and financial planner at IFS Wealth & Pensions, says: “I think to advocates and casual observers of bitcoin and cryptocurrency, abysmal performance in 2018 is an understatement, with huge losses being experienced across the major cryptocurrencies. Some predicted bitcoin to exceed $100,000 before year end.”
So why did cryptocurrencies default on expectations and what lessons can be learnt?
Why cryptos underperformed
Mr Chan adds: “I think many naive individuals suffered from FOMO [fear of missing out], so many piled into cryptocurrencies thinking it was a ‘get-rich-quick’ scheme. For sceptics, it was expected not to hold such wild valuations and many steered well clear.”
Neil Liversidge, managing director of West Riding Personal Financial Solutions, says: “Bitcoin completely met my expectations: it crashed and so did the others.”
Bitcoin lost 40 per cent of its value in January 2018 alone thanks to new regulations in South Korea as well as an announcement that Facebook would ban the advertising of crypto exchanges.
More uncertainty flooded the cryptocurrency market when Facebook later lifted the ban, followed by Google, which adopted a similar ban before backing down on it.
In addition to this, financial institutions across the world have been divided in their response to cryptomania, including Goldman Sachs, which surprised the market by opening the first bitcoin trading operation on Wall Street.
However, other cryptocurrencies such as Ripple, which is also used as a blockchain distributed ledger by several institutions, fared less poorly.
The price of ripple fell less than the dramatic price swings suffered by bitcoin at the start of 2018. Ripple is currently trading at around $0.33 a token, lower than the $2.24 at which it was being traded at the beginning of 2018, according to Cryptocurrency Chart.
“The large drop in prices has been accompanied by an increasing scepticism; this is possibly due to the fact that the promise to bypass the centralised economic system and enable peer-to-peer payments has been disappointing so far,” says Daniele Bianchi, assistant professor of finance at Warwick Business School.
Major players in the world of finance, such as Berkshire Hathaway’s Warren Buffett and JPMorgan Chase’s chief executive, Jamie Dimon, have criticised cryptocurrencies in mainstream finance.
Cryptoassets Taskforce
The Financial Conduct Authority has also taken a tough stance on cryptocurrencies and is currently exploring which assets fall under the regulatory perimeter.
The UK regulator will be consulting on “perimeter guidance” in early 2019 to provide clarity to consumers and companies as to which cryptocurrencies fall within the existing regulatory perimeter and which fall outside it.
On January 23, the City watchdog published a 50-page consultation report stating it expects providers carrying out regulated cryptoasset activities in the UK to obtain the appropriate authorisation from the FCA.
The FCA defined cryptoassets as tokens that have characteristics that are similar in nature to traditional instruments like shares, debentures or units in a collective investment scheme.
However, regulation of cryptocurrency exchange tokens such as bitcoin, litecoin, among other key cryptocurrencies were not mentioned in the document. This is because the FCA defined them as tokens which are not issued or backed by any central authority
The FCA will consult separately in early 2019 on whether to impose an outright ban on the sale of derivative products referencing cryptocurrencies, including contracts for difference to retail consumers.
Room for cryptocurrencies in financial advice?
The volatility shown by cryptocurrencies in 2018 begs the question: should financial advisers be steering away from them completely?
This is, in fact, the view echoed by several other financial advisers.
Richard Stammers, chief investment strategist at KW Wealth, notes: “We have no idea how financial advisers could use cryptocurrencies to earn returns in 2019, nor why they would even consider trying to do so.”
Mr Liversidge adds: “I think they’re as risky as it gets – and they are not investments. They are purely speculation on bits of computer code. At least in the tulipmania the buyers got a tulip bulb for their guilders.”
Jason Witcombe, chartered financial planner at Progeny Wealth, adds: “Advisers can help clients avoid [speculation in cryptocurrencies] by having an ongoing dialogue and relationship and being seen as a sensible sounding board.”
Allocation
Some commentators say financial advisers can include cryptocurrencies in clients’ portfolios, albeit in small allocations.
Beau Giannini, chief executive of Ternary Intelligence, which recently launched Hedged Bitcoin, says: “A relatively small allocation (up to 10 per cent) in cryptocurrencies could benefit portfolio diversification dramatically.”
Phillip Nunn, chief executive officer of Wealth Chain Capital, says there could be some potential, with new types of products coming to the market in 2019. “Bitcoin ETFs will be approved and also lower-risk products that specifically focus on companies with a blockchain strategy in the medium term.
“I would imagine when the product suite becomes available, some advisers will look to allocate small amounts, maybe 5 per cent, into this kind of offering,” he adds.
But steering away from cryptocurrencies completely seems a more popular option than the diversified approach flagged by Mr Giannini.
Mr Liversidge says: “Clients should not [be invested in crypto], and if they are then the rest of us are likely to pick up a compensation bill from the Financial Services Compensation Scheme, because regulated advice is compensatable even when the underlying investment is unregulated.”
Despite the new offerings coming to the market, Mr Nunn says that at present advisers should not be allocating any of their clients’ money into cryptocurrencies.
He explains: “This is a very niche market and it’s not for the faint hearted. 70 per cent losses are normal in the space and, clearly, if you have a long-term financial goal, it could be derailed by such losses.”
Saloni Sardana is features writer at FTAdviser and Financial Adviser
