Picture: 123RF/rungwit
Picture: 123RF/rungwit

In late 2017, cryptocurrencies were one of the most-discussed topics at many festive season dinner parties. Tales of visionaries who’d racked up fortunes on the back of bitcoin’s meteoric rise stoked the euphoria. And, they said, there was more easy money to be made.

As it turns out, the bubble was already preparing to burst that December. Initially, crypto advocates claimed it was just a "correction", and a chance to buy more. But as 2018 wore on and prices fell further, enthusiasm waned.

Bitcoin, the flagship cryptocurrency, has now lost more than three-quarters of its value since its high of R264,825 on local exchange Luno in December 2017. Today, it is trading at R58,452. According to CoinMarketCap.com, the combined market capitalisation of all cryptocurrencies fell from $573bn to $129bn in 2018.

There are numerous reasons: panic selling, tighter regulations and several high-profile hacks among them. But either way, those who bought at the top have felt the pain, and those who eschewed the frenzy must be feeling pretty smug.

"The bitcoin crash of 2018 has been the biggest economic bubble of our time, surpassing the famous dot-com bubble," says Barry Dumas, market analyst at Purple Group’s GT247.com.

Even now, Dumas says, "more and more investors are betting against cryptocurrencies" thanks to the introduction of derivative instruments that let them take short positions. "That doesn’t necessarily mean that these clients do not hold bitcoin as a long-term investment, but rather that investors are capitalising on the downward momentum in the short term," he says.

But FNB Wealth & Investments’ Wayne McCurrie points out that bitcoin has always been subject to wild price fluctuations, and has plunged more than 50% a number of times.

To put things into perspective, the coin is still worth nearly five times what it was two years ago. Bitcoin is likely to stick around, says McCurrie, though many "copycat" cryptocurrencies will fall by the wayside.

Nevertheless, he says, "there is really only one rule for investing: diversify".

Dumas says the fledgling crypto market faces another uncertain year. "One fundamental challenge is the cost factor of mining and the power usage it takes to mine bitcoin," he adds.

Reports say that more than 100,000 cryptocurrency miners (those who verify transactions and add them to the digital ledger) have shut down, and over a million servers have been unplugged since September. In general, bitcoin mining is said to be profitable only when prices are above $4,500. On average, it takes 1,300 days and nearly 40,000kW of electricity to mine one bitcoin, says Dumas.

"So the return on investment for miners got pretty thin as the value dropped," he says.

Still, some market commentators are optimistic that bitcoin can hit new highs in 2019.

Ran Neu-Ner, host of CNBC Africa’s Crypto Trader show, says combined market values could reach $1-trillion in 2019. "I think there is more upside than downside," he says.

But even if the market recovers, the free ride is over for law-abiding SA traders. In 2018, the SA Revenue Service (Sars) said cryptocurrency earnings were subject to ordinary income tax and capital gains tax (CGT).

Rob Hare, senior associate at law firm Bowmans, says he hopes Sars will start introducing guidelines to make tax compliance easier on this front. "One of the more difficult questions faced by holders of cryptocurrencies is whether their gains on buying and selling them should be subject to income tax or CGT."

To clear things up, he says regulators should introduce rules that deem crypto gains to be subject to CGT if it is held for a certain amount of time, as is the case with shares.

Either way, the silver lining is that even if bitcoin is ultimately consigned to the history books, there’s consensus that the underlying technology is here to stay. Blockchain, the ledger system that records transactions, is tipped for a bright future in almost every industry as it boosts transparency and efficiency. In blockchain accounting, for example, a real-time shared records system lets auditors and regulators view and validate ledger entries as they happen — critical in the war on fraud.

"I’m more confident than ever that blockchain is going to be the biggest revolution in our lifetime," Neu-Ner says.

Dumas says too that blockchain "will change our lives drastically within the next three to five years". Investors hoping to get in on this action should look for companies that are developing and introducing blockchain to the mainstream.

IG analyst Shaun Murison agrees, but says "the fate of the actual currencies which run on top of the blockchain remains under question".

Vestact’s Michael Treherne says he’s not convinced that cryptocurrencies will replace traditional currencies for day-to-day transacting. "Who wants to convert your salary from rands to bitcoin, to then buy something priced in rands? You might as well just leave it in rands."

But Treherne does see cryptocurrencies and blockchain disrupting the painfully slow and expensive payments market. "Imagine being able to do an international payment with the same ease that we currently do local EFTs [electronic funds transfers], at a similar cost."

Now that’s a more compelling vision.