Cryptocurrency trend in boom or gloom? A run through by Commerzbank

The depreciation of crypto currencies accelerated in 2018. After the realisation that cryptocurrencies are unsuitable as currencies it has now also become obvious that many are also unsuitable as a means of payment. 2018 might constitute the beginning of the end of bitcoin and that of many other crypto currencies. 

2018 was an annus horribilis for crypto currencies. As far as bitcoin (XBT), the by far most liquid amongst the crypto currencies, is concerned, the drama started to unfold at the beginning of the year. The speculative bubble, that had started to show signs of cracks in December 2017, burst completely in January. Following a brief bounce (16.753 on 5th January) the USD- XBT exchange rate dropped to 7.101 within the space of one month, or until 5th February (refer 1stchart). The mother of all crypto currencies therefore lost almost 58% of its value within one month. 

In other words, the price of goods expressed in bitcoin recorded a rate of inflation of approx. 175% over that month. That would have been a staggering 17.5 million percent on an annualised basis. For a currency, whose proponents promote it as a protection against the risks of inflation of standard currencies, we find that an impressive figure! Bitcoin was unable to recuperate from this blow all year. 

That did not really come as a surprise. We had already argued in 2013 that the bitcoin chart represented a sequence of speculative bubbles which would always burst again quickly. Monetary economics alone suggest that. Even if bitcoin continues to play no significant role as a means of payment, the hope that this might change at some point in the future was sufficient to cause price rallies that led to extremely high exchange rate volatility and extremely high fluctuations of prices of goods (as calculated in crypto currencies). If one looks at these highly volatile inflation rates, it quickly becomes evident to everyone that a currency of this nature is unsuited for storing purchasing power – and thus as money. The hope of a crypto currency becoming an established currency vanished and as a result the speculative bubble burst. 

Particularly during the period when a currency establishes itself as legal tender it would require a very variable money supply to recommend itself as an alternative to the usual currencies, as demand for money will also fluctuate particularly heavily during this period. As crypto currencies usually provide an inflexible supply, this leads to periods of extreme deflation and inflation that rule out its suitability as a currency. That was foreseeable. It had always struck me how the proponents of crypto currencies tried to deny something that the economist had known for a long time: that a sensibly varying money supply is an important feature of a currency. Courtesy: commerzbank

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -20 levels (which is mildly bearish), while hourly BTC spot index was at -111 (bearish), while articulating (at 09:42 GMT).

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