Price swings in cryptocurrencies could slow down its adoption

Soaring high: The price of a bitcoin surpassed US$50,000 for the first time on Tuesday. — Reuters

CRYPTOCURRENCIES are back in vogue largely after Tesla invested US$1.5bil in Bitcoin. Since late 2020, cryptocurrencies dominated by bitcoin, have been on a wild ride.

The price of a bitcoin surpassed US$50,000 for the first time on Tuesday, and surged higher on Thursday to US$52,000. This was compared to its price of around US$10,000 a year ago and around US$400 five years ago.

It is worth noting that bitcoin is just one of thousands of cryptocurrencies in existence, with many more coming into the market.

Bitcoin is inching closer to a US$1 trillion in market capitalisation. This is close to the size of companies like Apple and Amazon.

Other cryptocurrencies, such as Ethereum and Litecoin are also popular among investors, but neither come close to bitcoin’s market cap.

Bitcoin, which was created in 2009, was the first decentralised cryptocurrency. A single bitcoin was then worth almost nothing at a quarter of a US cent.

“At the current price, buying into bitcoin is very risky because it is very volatile. I would prefer to look into other cryptocurrencies that have potential to be tapped by corporates, ” says an investor.

When asked why people are rushing into buying bitcoins now, he says “It is mostly based on speculation and to some extent a hedging mechanism.”

“But, you won’t get the exponential returns as the spread between buy and sell is quite huge and the transaction fees are not cheap, ” he adds.

A channel check showed that to move cryptocurrencies between exchanges or wallet providers costs about RM120-RM150 per transaction. Cryptocurrencies can reside in a digital wallet but have to be transferred to a crypto exchange for trading. In some instances in the past, exchanges were hacked and cryptocurrencies lost. Users have little legal recourse when that happens.

Prior to the current rally, the last time bitcoin rallied was in 2017, when it started the year at US$1,000 a piece to almost US$20,000 by year end.

It quickly plunged to as low as US$3,122 a year later, and it remained there for the next three years until 2020.

The difference between now and three year ago is that bitcoin seems to be taken more seriously now.

Adoption by corporations such as like PayPal and Tesla could be a “game changer” some predict.

Tesla also said it might accept bitcoin as means of payment to buy its cars.

However, US-based investment firm Wedbush Securities Inc said that mass corporate adoption may remain elusive in the short-run due to bitcoin’s high price volatility.

“Given the still nascent and volatile nature around bitcoin, less than 5% of public companies will likely invest in bitcoin over the next twelve to eighteen months, but that could move “markedly higher” as more regulation and acceptance of the cryptocurrency takes hold in the future, ” Wedbush’s analysts said.

Back home, Kenanga Investment Bank bought a 19% stake in Tokenize Technology (M) Sdn Bhd (Tokenize Malaysia), an online exchange that allows trading of cryptocurrencies.

Tokenize Xchange, is one of the three licensed Digital Asset Exchanges (DAX) by the Securities Commission of Malaysia (SC).

Kenanga said in a statement that while it is aware of the volatility of the cryptocurrencies, the acquisition is part of the group’s overall plan in building a digital ecosystem, which is beyond trading of bitcoin and other cryptocurrencies.

“The emergence of digital assets including cryptocurrencies have been gaining acceptance globally in the last few years.

“While we are keen on crypto as an asset class, we are aware of the volatility and the proliferation of unregulated players in the market, ” it said.

“Our interest in digital assets goes beyond Bitcoin and other commonly traded cryptocurrencies. We believe that the technology behind digital assets is very powerful and the emergence of digital assets in the future is inevitable, ” it added.

The question is, how will cryptocurrencies such as Bitcoin be used as a means of transaction if it remains volatile?

JPMorgan Chase & Co believes that unless Bitcoin’s volatility eases, the current price of the cryptocurrency “looks unsustainable”.

“Whether cryptocurrencies are judged eventually as a financial innovation or a speculative bubble, Bitcoin has already achieved the fastest-ever price appreciation of any must-have asset to which it is often compared such as Gold (1970s), Japanese Equities (1980s), Tech stocks (1990s), Chinese Equities (2000s), Commodities (2000s) and FANG stocks (2010s), ” it said in a report entitled ‘Digital transformation and the rise of fintech’.

Interestingly, JPMorgan said bitcoin could rally as high as US$146,000 in the long term as it competes with gold as an “alternative” currency.

On the contrary, Microsoft co-founder Bill Gates is not a fan of bitcoin or other cryptocurrencies.

In an interview with The Wall Street Journal Gates said this: “The way cryptocurrency works today allows for certain criminal activities. It’d be good to get rid of that, ” he quickly added: “I probably should have said bio weapons. That’s a really bad thing.”

Meanwhile, in an interview with CNBC, he said he has “neutral” stance on bitcoin

“I do think moving money into a more digital form and getting transaction costs down, that’s something the Gates Foundation does in developing countries, ” he said.

“Bitcoin can go up and down just based on the mania or whatever the views are and I don’t have a way of predicting how that will progress, ” Gates added.