It has been a blockbuster year for bitcoin. Despite the recent crash, the digital asset broke multiple records in prices this year, starting from breaking its key resistance level of US$60,000 ($81,900) at mid-March.
After a slump, bitcoin prices climbed again to US$66,00 apiece on Oct 21, eventually reaching an all-time high of US$67,145 on Nov 9. While prices have since then dropped to below US$50,000 (as at Dec 6), players are still bullish amid continued criticism from market observers.
Marcus Lim, CEO of cryptocurrency exchange platform Zipmex, says the volatility seen in the last 12 months in the cryptocurrency market, specifically bitcoin, is driven by a number of factors.
The first is greater institutional interest. This includes Tesla announcing its intentions to accept bitcoin as a form of payment, Nasdaq-listed business intelligence company MicroStrategy’s large bitcoin investments, and even the participation of endowment funds, which traditionally have put their money in safe and boring investments but that can give predictable returns.
Additionally, more attention is being paid to altcoins which have enjoyed significant price increases this year due to their close correlation with bitcoin, says Lim. “Admittedly, the volatility is also caused by a lot of speculation, which may be driven by the increasing interest in perpetual futures products. The crackdown in China also played a role, although many of the miners have migrated to other countries.”
Among other developments in the space, the perception towards digital assets as a mode of payment for illicit transactions has slowly changed, says Kelly Chia, deputy head of research, Asia, at Julius Baer. He adds that the percentage of bitcoin transactions related to such activities has fallen and stayed stable at around 1%.
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“The underlying technology is also very promising, which has prompted central banks to explore introducing Central Bank Digital Currencies. They were dismissive of it initially, but have increasingly recognised its benefits such as less friction and much lower costs,” says Chia.
What critics say
That is not to say that cryptocurrencies do not have critics. There is a long list of high-profile names that belong to this camp: Warren Buffett, his long-time business partner Charlie Munger, Microsoft founder Bill Gates, and Jamie Dimon of JP Morgan. Reasons cited for their scepticism include cryptocurrencies not having any intrinsic value, their highly volatile and speculative nature, as well as the environmental impact of cryptocurrency mining.
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Oanda senior market analyst Jeffrey Halley says the volatility in bitcoin and Ethereum — the second largest cryptocurrency by market capitalisation — remains far too high to form any meaningful part of a sensible investor portfolio. While he acknowledges that Ethereum’s blockchain has commercial potential, any sensible use of bitcoin has yet to be seen.
“Bitcoin remains a ‘haven’ because people think it is a haven. There is no fundamental reason behind why bitcoin should be a haven. I am also sure that 99.99% of investors ‘invest’ in cryptocurrencies not because of a bright blockchain future, but because they can make easy and rapid returns,” says Halley.
He adds that regulations across the world for cryptocurrencies are piecemeal at best. “One of bitcoin and cryptocurrencies’ reasons to be is that they are alternative modes of storing value outside of the traditional financial system. Therefore, how can cryptocurrencies be taken seriously when experts talk them up as the future of finance due to tighter regulation?”
Meanwhile, most institutional participants are involved in facilitating transactions, which means that they take a cut matching up buyers and sellers. They do not take on primary risk, says Halley. He expects most institutional participants to disappear when the cryptocurrency market experiences an inevitable sustained bear run.
Reiterating that bitcoin is a tradable asset and not an investible one, Halley describes altcoins as a giant pass-the-parcel game. “The value of the coins is what people think it is worth in the hope of selling it on to another person for a higher price before the music stops. Outside of bitcoin and Ethereum, the altcoin space is nothing but a speculative Wild West, and has no meaningful business case and where the main store of value are Elon Musk and Jack Dorsey’s Twitter accounts.”
Will bitcoin reach US$100,000?
While critics continue to shun digital assets, many retail punters and institutional investors alike are punting for the run to continue. Bitcoin is expected to reach US$100,000 by December, according to a bitcoin analyst with the pseudonym PlanB who created the widely known stock-to-flow (S2F) model.
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The S2F model attempts to predict the long-term price trend of bitcoin by evaluating its supply, taking into consideration its fixed supply and the block reward halving. The theory behind S2F is that as the supply of bitcoins decreases over time, inflation will continue to rise. These two factors could theoretically amplify bitcoin’s uptrend.
The S2F model has, to a certain extent, accurately predicted the expected value of bitcoin over the last decade, says Zipmex’s Lim. This year, the model’s predictions for both August and September prices resonated with the actual monthly closing prices of US$47,000 and US$43,000 respectively. Meanwhile, October’s predicted monthly closing price of US$63,000 ended up with a 3% rounding error at US$61,000.
The scarcity model predicts that bitcoin will surpass US$98,000 in November and US$130,000 by the end of the year. November’s actual price, however, was only at around US$67,000, missing the predicted figure by wide gap. Despite this, Lim is bullish that bitcoin would eventually reach US$100,000 apiece, be it any time before the end of the year or sometime next year.
Criticising the S2F model, Halley says logic suggests that the model will continue to mark the future price higher as it is based on future supply. “In a way, it is a self-perpetuating comfort blanket to bullish cryptocurrency traders,” he adds.
Meanwhile, Chia says Julius Baer is establishing its own model to predict digital asset valuations. To do this, the firm is exploring onchain data models as well as social media scores.
The way forward for NFT
Last year, the cryptocurrency space was abuzz with greater participation from new investors due to the hype surrounding decentralised finance (DeFi), which aims to liberalise the way the financial industry is operated by using blockchain technology. DeFi seeks to replicate what exchanges, banks and other financial institutions are doing, but execute them in a more direct and convenient manner using smart contracts via decentralised networks such as the Ethereum blockchain.
This year, however, the hype is focused on non-fungible tokens (NFTs). As the name suggests, NFTs are non-fungible, which means they are unique and irreplaceable, thanks to the identifying information recorded in smart contracts. According to research by Cointelegraph, NFT sales have grown to US$2.5 billion in the first half of 2021 from just US$41 million in 2018, representing a 60-fold growth in 3ó years.
One of the highest-valued NFT ever sold is by Mike “Beeple” Winkelmann, who created “Everydays: the First 5,000 Days”, a collage of 5,000 digital images. The NFT was sold at Christie’s for US$69.3 million, making it among the most expensive works by a living artist.
Julius Baer’s Chia says while there are parts of the NFT market that are bubblish — such as images primarily used for a social-media profile picture being sold for millions — the technology is definitely solving problems that the art community has been facing for many years. For instance, the digital ledger technology is extremely useful for tracking copyright ownership and maintaining records of creation, which means that creators always get the right credit for their work.
“There are also models of revenue generation where creators would receive a perpetual stream of royalties from selling their NFTs. This means that they earn a certain amount from each resale, which can be tracked,” says Chia. “In the past, artists only benefitted upon the sale of their art but did not reap any gains if the value of their art appreciated or was resold. The next generation of artists and their families should reap from the advent of such smart contracts.”
Coinhako co-founder and CEO Yusho Liu says aside from democratising the art industry, NFTs also allow artists and creators to engage directly with fans. The company recently co-organised the first large-scale NFT exhibition in Singapore, bringing together some of the most influential artists and collectors of the digital and crypto art world.
“Entering 2022 and beyond, cryptocurrencies will ‘become culture’. The growth of NFTs has led to more brands, artists, musicians and creators turning their attention to the space. With Meta’s major push in virtual reality, there will be a dire need for digital versions of real-world experiences. With this, the blockchain gaming and crypto industry will only get bigger in the next decade,” says Liu
Photo, from left: Zipmex's Marcus Lim and OANDA's Jeffrey Halley
