Today we consider bitcoin and the other cryptocurrencies: the likes of ethereum, bitcoin cash and monero.
After a promising July which saw bitcoin rally almost 45% from low to high, August has seen most of those gains given back.
Barring the odd day, it's been pretty much straight down. The price is back where it was, hovering around the low $6,000s.
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So, what gives? And what's next?
It has been a tough month for bitcoin and its crypto-cousins
I suppose the tell-tale sign that bitcoin's July rally had weak foundations was that the "altcoins" alternative to bitcoin, basically, often with slightly different characteristics were, on a relative basis, so disappointing.
While bitcoin may have gone from a late June low of $5,750 to a July high of $8,500 a 45% rally in a fortnight (that sort of rally almost deserves its own exclamation mark) the altcoins were pretty much flat.
Normally, the altcoins are more volatile. They rise by more in the bull markets and fall by more when the bear takes over. They're bitcoin's more volatile little sister, silver to bitcoin's gold, junior miners to bitcoin's metal.
Ethereum, for example, the best known of the alts (its use is more for applications, rather than as cash settlement), simply meandered between $400 and $500. The trajectory of bitcoin cash (bitcoin's off-shoot, designed, it says, to fulfil Satoshi Nakamoto's original vision) was similar.
Other coins ripple and litecoin (once the number two coin, though now its days look numbered) were really poor. The best they could produce was sideways movement in a broader trend that grinds inexorably lower.
Of all the categories of coin, I like the privacy coins coins, which do not have the transparency of bitcoin's blockchain, and so are much harder to trace. In doing so, they fulfil one of cash's key functions to be private and so are already finding considerable real use as a medium of exchange.
The reason I like them is the simple fact that they are actually being used. People aren't just buying them because they are speculative assets in a boom.
But even the privacy coins have taken a walloping. Some more than others, it is true but if you had an index of privacy coins (and yours truly will soon have such a thing), the trend would be down.
Only bitcoin (and a couple of other exceptions) had a strong July. In a proper bull market scenario, you want to see the speculative tiddlers leading. They didn't. And when you don't have that scenario, doubts are well placed: don't believe they hype, as they say.
It all looks much more obvious now, of course, now that we have the benefit of hindsight. The picture in real time is never as clear. Decisions are much easier to make in the rear view mirror, when the outcome is already known.
Bitcoin really doesn't need an exchange-traded fund
The broadly accepted reason for the change in sentiment that occurred in late July was that the US's Securities Exchange Commission (SEC), whose role is to maintain the "fair and orderly functioning of securities markets" it's the main regulator, basically announced that it was delaying its decision whether to approve or disapprove a proposed rule change that would allow a bitcoin exchange-traded fund (ETF) to list in the US.
America has been waiting for a bitcoin ETF for what now seems likes decades, and yet it never seems to happen. There's always one reason or another why it doesn't, almost always regulatory. A bitcoin ETF would be extremely bullish for bitcoin because it means that, finally, institutional money could enter the sector through traditional brokerages and that should mean a flood of investment capital.
When it gets announced that said ETF is not about to occur, as happens every few months, it seems, anticipation is curtailed and positive sentiment turns negative.
My view is that bitcoin does not need an ETF. It has done perfectly well without one. Yes, a US-listed ETF would be the bullish for the price, but bitcoin is supposed to be an "anti-finance and banking" alternative asset so why are people getting so hung up on mainstream capital entering the sector by mainstream means?
Whatever. The price sold off when the announcement came, though it is worth noting that the announcement came on 7 August. Bitcoin's high came on 25 July. It had already lost $1,500 -a good 20% of its value when the announcement came. The announcement certainly made things worse, but the price was already in decline.
The net result of all this is that bitcoin's market share of the crypto space has grown. altcoins now occupy a smaller part. Bitcoin's critics can rightly point to the fact that there are other coins that are "better" than bitcoin: some have faster and lower transaction speeds, others are more private, others have greater utility and so on.
But what bitcoin has is huge market share, as a result of its first-mover advantage. That network effect counts for a great deal. Those who argue that bitcoin is MySpace and that Facebook has not yet been invented, or that bitcoin is Netscape Navigator and we are still waiting for Google, would do well to take note of the effect of bitcoin's immense network advantage.
What's next for cryptocurrencies?
Going forward, bitcoin seems to have a great deal of support just below $6,000. This is the low that keeps on holding so much so that some argue this market is actually being artificially propped up.
The risk-reward of buying while bitcoin sits around $6,000 with a tight stop just below $5,750 makes some sense.
The altcoins however are grinding lower. They have broken support. There is a real danger they could drag bitcoin down.
Sentiment in the sector is negative. Many who came to the market late in 2017 have lost money. Bottom line is that this is a bear market. I lived through the market cycle in gold from the bull market of the 2000s to the bear market of the 2010s (still ongoing). I know how hard things can get; and how long they can remain bad for. Gold doesn't have the sexiness of a new technology, or a young dynamic workforce. That will likely make bitcoin's bear much shorter-lived.
But it isn't over yet.
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