What happened to cryptocurrencies and what’s next?

Can you believe it’s been two years since the world fell in love with cryptocurrencies? In the lead up to the end of 2017 Bitcoin was talked about everywhere. So, is it likely to make a comeback?

Even my dog was asking if she should invest in it (I said no)*. Bitcoin peaked in mid-December of that year at almost US$20,000 per coin. Today, it’s closer to US$7,000.

So what happened?

As the boom progressed, cryptocurrencies became a classic case of “beware the crowd”, with speculators making gains on new entrants wanting to be part of the action rather than the underlying value of the asset. As soon as that rush of new entrants slowed, the market corrected itself and a lot of investors were burned.

The reality is that you need to be cautious of emerging investments like this. I think there is a big future for blockchain - the technology behind cryptocurrency – but I couldn’t actually tell you how this all turns out, and I’d wager there are very few “experts” who could.

Blockchain could well become a part of the architecture of technology you use every day, but that may not necessarily mean a particular cryptocurrency will be the winner, - it could well be a government-backed cryptocurrency rather than a private sector coin.

When the crowd is most interested in an asset class, it’s often the time to be cautious. We certainly saw that two years ago, with an extraordinary number of people placing their trust and their savings in something that didn’t generate income and had fundamental limitations as medium of exchange.

Into the future the role of blockchain and cryptocurrencies might become more clear, but in the meantime I’d remain cautious about their worth as an asset going forward. They certainly haven't proven to be a good store of value; being not only more volatile than fiat currency, but also than major stock markets.

If I was buying a property, for example, I’d worry about moving money into a cryptocurrency for the settlement because I’d have serious doubts about where that currency might go in the meantime. On the other hand, I've got pretty high confidence that Australian or US dollars will still be worth what they say they are worth when it comes to settle on the property.

It's entirely possible that Bitcoin makes another rally in the next couple of years, although I suspect than many investors learned important lessons the last time about following crowds and investing in assets they don’t fully understand.