If 2017 was the year that cryptocurrencies made their grand entrance to the global financial dinner party, then 2018 is the year when everyone works out where they should sit.
With prices surging and slumping, Initial Coin Offerings (ICOs) vanishing faster than Arctic sea ice, hackers spreading fear, and authorities struggling worldwide to form coherent regulatory structures, the cryptocurrency landscape for investment professionals is confusing at best.
The story isn’t surprising: an asset class that sees explosive growth while remaining independent from any central authority — the way that cryptocurrencies did in 2017 — will either become subject to regulation or abandon its dizzying upward trajectory.
In truth, hostility to cryptocurrencies has been building in parts of the financial establishment for some time. Box-office names like Warren Buffett and Bill Gates have been scathing about the negative impact and future prospects of cryptocurrencies. Even the blockchain technology underpinning Bitcoin and other cryptocurrencies has been derided as a “pipe dream” by Nouriel Roubini.
Supporters have argued that escalating attacks are based on fear, driven by the growing importance of cryptocurrencies. The recent backpedalling by formerly vitriolic opponents, like Jamie Dimon of JPMorgan Chase, has been cited as evidence that critics are on the wrong side of history.
There’s no question that big hurdles must be cleared on the path to credibility. The largest is regulation, an area where the world is still feeling its way. The US seems torn between its ideological loyalty to financial market liberalism and its fear of illicit activity, left uncertain about how tightly it should hold the regulatory reins. Authorities in Beijing and India have made abrupt U-turns to launch rigorous crackdowns. Switzerland is famously intent on turning itself into a torch-carrying “crypto-nation.” Russia and South Korea can’t decide whether to emulate China or Switzerland, and Japan’s progressive stance may be tested by a major hacking theft. The EU and Canada seem to be leaning toward a hands-off approach, and Singapore remains stoutly pragmatic.
Concerns fall into two main categories. One is that the anonymity of cryptocurrencies makes them the perfect channel to finance criminal activities. However, customer due-diligence requirements for cryptocurrency exchanges are in the pipeline for many jurisdictions. To date, evidence of widespread use of cryptocurrencies to launder money has been scant.
The second concern is that cryptocurrencies are an intrinsically worthless, speculative fad. Although the emergence of cryptocurrency derivatives in US, EU and Singapore markets looks like a step towards credibility, many of these products are under increasing scrutiny. The collapse of ICOs, as well as the theft of billions of dollars’ worth of coins by hackers, have not done much to help the credibility of cryptocurrencies.
So far, the global cryptocurrency landscape has been a map of many possible roads but not enough signposts. Investment professionals must tread with extreme caution — investors may recover lost money, but experts making the wrong call on cryptocurrencies will find it much harder to recover their reputations.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: Getty Images