As a Software Engineer and former foreign exchange (ForEx) trader for a couple of international banks (one Irish, the other American), the recent hype surrounding cryptocurrencies (‘cryptos’) has piqued my curiosity.
Back in the day (1990/1991) we traded from a computerised dealing room in London’s infamous square mile known as The City. We bought and sold currencies, betting the exchange rate (value) of the currency would rise or fall over a 3, 6, 9 or 12-month period. Risk management algorithms were built into the volume and level of the daily contracts we traded. To a certain extent, one trade was ‘covering the ass of’ another, minimising the risk of large losses. What intrigues me about ‘cryptos’ is that they are accessible to the ‘man on the street’ who has less than a clue about what he is doing, why he is doing it and, critically, what global events are affecting the price of the currency.
On the face of it, cryptocurrencies are gaining serious and enthusiastic traction on the international markets. A cursory web search spits out a litany of new trading platforms and brokerages where you can invest your disposable income in a variety of currencies, the leading ones being Bitcoin (BTC) and Ethereum (ETH). Stories abound of this guy that invested last year and bought a new house with the proceeds, that guy who quit his job after dropping every dollar of his savings into bitcoin just before its price leaped to previously unimaginable heights. The whole ‘crypto’ scene can be described in a single word – volatile.
But surely volatility must be followed by some modicum of relative stability, I hear you say. Yes. That logic is sound but, as an investor looking to make a profit in a volatile market, that is not the question you should be asking. Rather, you should be focused on the highs and lows embedded in that period of volatility. Success in investing is all about predicting the highs and lows. Buy when the price is at its lowest and sell when the price peaks, pay your brokerage commission and walk away with the profit.
So how do you predict when the price is lowest and at what point can you be certain the time is right to sell? In the case of traditionally traded stocks and currencies, there are clear predictors which are known to affect the price. For example, stocks in the aeronautical industry fell over the cliff in the wake of the 9/11 attacks. The time to sell your American Airlines stock was around 8am (EST) on 11th September 2001 – just before the price plummeted. Even if you had acted shortly after the attacks (let’s face it – not many knew they were coming), you could buy back the same volume of stock a couple of hours later at a fraction of the cost and reinvest in more stock or pocket the difference. In fact, many did! I’m not sure where I stand on profiting from disaster but it certainly doesn’t sit well with me at first glance!
The trouble with cryptos, as I see it, is that there do not appear to be any real-world predictors for price movement in either direction. Yes, there was news last week that North Korea and China were going to ban trading in cryptos which resulted in a massive drop in the value of all cryptocurrencies but these kinds of announcements are (and will be) few and far between.
The markets do not yet know for certain what global events will most influence the price of cryptos and it is this uncertainty which virtually guarantees continued volatility.
In the interim analysis (it’s too soon for my analysis to be called ‘final’), I am left wondering about the global ratio of early-adopters to ‘sit and wait’ investors. The earlier you enter a new market the more significant the risk you accept but the higher the potential gains. If sufficient numbers of early-adopters prove the gains, the blue-chippers will (slowly and steadily) follow – and the market will stabilise.
In the overall scheme of things, cryptos are an early-stage product and will mature ‘naturally’ as all new products inevitably do. How long that takes is virtually impossible to predict. The rate of that maturation will dictate whether we have a fad or a future product on our hands. For the sake of democratising global currencies and curtailing monopolisation by the likes of my former employers, I sincerely hope the latter becomes the virtual reality.