Bit up, Bit down but still going strong

Bitcoin is now in its 13th year. But will 2022 be a crypt-astrophe for some? asks Ron Delnevo

When I started to research this article, the first surprise for me was that cryptocurrencies have only been around since 2009.

It was on January 3 that year that Satoshi Nakamoto, apparently determined to create a currency that could operate outside the control of traditional banks, mined (found a number used only once by deploying massive computer resource) the genesis block of Bitcoin.

Nine days later, the first transaction on a blockchain network was 10 Bitcoins, sent to Hal Finney, one of the first promoters of the cryptocurrency. A pause here for a word or two on blockchain, which was first conceived in the 1990s.

A blockchain is a decentralised digital ledger. Each block is a page, with a unique digital signature. A block can only be changed with the consensus of the tens of thousands of computers around the planet that hold the legitimate records of each block and relevant links.

Bitcoin is simply one product whose transactions are validated on a blockchain. Reportedly, more than $6billion was spent in 2021 on blockchain solutions, many of which had zero connection with Bitcoin or any other cryptocurrency.

One perhaps surprising use of blockchain technology has been in the music industry. For example, recently, Kings of Leon released a new album as a non-fungible token, in the form of digital data stored in a blockchain. Clearly, blockchain must be music to many ears.

Anyway, leaving blockchain to its own very diverse devices, 2022 marks the 13th anniversary of the launch of the planet’s first cryptocurrency, although we can’t congratulate Nakamoto because no one Bitcoin values were seen again; in November 2021 it hit a ceiling of just over $68,000.

So, the reality of the volatility of Bitcoin is that anyone who bought Bitcoin between 2009 and 2020 and retained their holding, has made a very substantial paper profit. However, those who bought and sold during 2021 and the first half of 2022 may now be either nursing losses or enjoying profits, given the volatility during that period.

In short, as with many traditional investments, taking a long-term view has been the best policy with Bitcoin. This is almost certain to continue to be the case. That said, Bitcoin’s volatility since 2020 has been very striking.

In March 2020 – more or less the start of the COVID pandemic – each Bitcoin was worth barely $4,000. A year later, the value had increased to $65,000, only to then plunge by 50 per cent over a few weeks. To counter such swings, a new class of cryptocurrency was developed in 2014: stablecoin.

Stablecoins were designed to have their prices tied to real-world assets, such as the US dollar. An example of the stability that can be achieved by stablecoins can be found in the shape of Tether, the first to be launched in 2015 and by far the largest in terms of capitalisation, reaching more than $70billion so far in 2022. Tether is pegged to the US dollar, and those that hold it, claim that since 2015 they have never failed to redeem their coin at a guaranteed value of $1. However, not every stablecoin has fared so well.

During May 2022, a new type of ‘algorithmic’ stablecoin – TerraUST – lost its peg to the US dollar. This had an immediate negative impact on the price of both TerraUST and its sister coin Luna, which was never pegged to any real asset,

knows who Nakamoto really is or was. Perhaps it would have been appropriate if this nom de plume had offered a cryptic clue as to his, her or their real identity, but it didn’t. And, so, it may well remain a mystery for all time.

Those 13 years have seen the market for cryptocurrencies enjoy phenomenal growth, to the extent that Bitcoin is now one of around 10,000 active cryptocurrencies available worldwide, which are currently being used by 300 million people.

In May 2022, the value of the Bitcoins Nakamoto enabled that have been mined so far – more than 18 million – was around $500billion. But – and this is where cryptocurrency’s 13th year may turn out to be unlucky for some – only six months previously, that value stood at more than $1trillion. I would describe a fall of around 50 per cent in six months as unlucky, to say the least.

Bitcoin hasn’t been alone among cryptocurrencies in suffering dramatic declines during this bear run. Ethereum, the next largest crypto, has seen its capitalisation fall almost precisely in line with Bitcoin’s performance. Such a sharp decline, say crypto’s critics, is evidence of the extreme volatility of Bitcoin. However, an examination of the 13-year history of the Daddy Crypto doesn’t necessarily validate that view.

FLUCTUATING VALUATIONS

In the initial stages, a Bitcoin was virtually worthless, valued at a fraction of the US dollar. In 2011, two years after the first Bitcoin was mined, the peak value of a coin was $32. Two years later still and the price fluctuated between $13.40 and $1,200.

The 2013 high of $1,200 was not reached again for another four years, in 2017, when each Bitcoin was worth anything from $775 to a peak of $19,343, reached on 16 December that year. It would be another four years before such

As with many traditional investments, taking a long-term view has been the best policy with Bitcoin.

This is almost certain to continue to be the case

but it was linked to TerraUST. As the price of both coins tanked, Luna kept being minted. In the space of a few days, TerraUST lost around 80 per cent of its value. Luna suffered an even more catastrophic fall, with a 99 per cent decline. It rendered the market illiquid and forced the relevant blockchain to be switched off, making trades impossible.

A market capitalisation of approaching $30billion was effectively wiped-out in a matter of days, with a huge negative impact on many investors. One who reportedly purchased $3million of Luna lost all but a few thousand dollars within 72 hours. Overall, investors in both coins have reportedly lost north of $42billion.

The lesson here may well be that for a stablecoin to be relatively stable, the issuer must have substantial liquid collateral assets to allow timely redemption of the crypto. The issuers of Tether have strong collateral assets in place, adequately covering at least 80 per cent of the potential coin redemption costs they might face. This explains why they have reportedly been able to redeem their stablecoins to the value of $8billion-plus in May 2022. Terra, it seems, was not in the same position of strength.

In any event, it is clear that there is much to consider in relation to investments in cryptocurrencies. However, despite Warren Buffett describing Bitcoin as ‘rat poison squared’, long-term investments in the founding crypto have proved to be lucrative and, in a troubled world, may well continue in the same vein.

It is certainly strongly arguable that the billions of sterling that the British public gamble each year would be better invested in Bitcoin. Very few of the 24 million UK-based gamblers make a profit on their wagers, whereas long-term crypto ‘betting’ to date has a proven record of success.

The 300 million or so current crypto ‘believers’ don’t have to look far for an online cryptocurrency exchange through which to buy and sell coins – there are hundreds. There are even ATMs at which Bitcoin and altcoins can be bought, though 80 per cent of these are currently in the US. Founded in 2016, the biggest operator – Bitcoin Depot – now has 7,000 ATMs in 49 states, as well as some across the border in Canada.

There are currently very few cryptocurrency ATMs in the UK – and the vast majority that do exist are in London. However, this is likely to change as HM Treasury seems committed to seeing this country take the lead in all things crypto as the decade progresses.

Finally, you might be wondering where it’s safe to ‘keep’ your Bitcoins. It’s a very important consideration. One purchaser, who kept his Bitcoins only on the hard drive of his PC, seemingly inadvertently threw away coins worth half a billion dollars when he binned the computer. The hard drive is now buried in his local council refuse tip, with the local bureaucrats not yet persuaded to allow a recovery mission.

To avoid such a fate, most crypto investors keep their precious coins in what are called ‘cold wallets’. Oddly, these can be as unsophisticated as a record of the private Bitcoin key printed on a piece of paper, no doubt securely stored in a home safe or a bank safety deposit box.

You could therefore safely say that, on paper, Bitcoin can be a good investment!