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Is cryptocurrency a haven from market volatility?

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It’s been a wild ride for cryptocurrencies over the past year, but can they become a stable store of wealth for investors? 

If there is such a thing as a cryptocurrency geek, Campbell Pentney is one. The Auckland lawyer buys and sells “coins” and “tokens” (those digital markers of crypto-wealth) and puts them in his encrypted online “wallet”. Pentney knows prices of obscure cryptocurrencies; he follows dozens of crypto-related websites. His work with law firm Bell Gully involves discussing the tax implications of cryptocurrencies with people from the Inland Revenue Department.

Pentney is also a wealth of great stories about the weirder side of crypto. Potato “coins”, Trump coins, the Venezuelan “petromoneda”, allegedly backed by government oil. He’s even heard of a Jesus coin.

But at the more mainstream end of town, people are making (and losing) big bucks on cryptocurrencies. Daily worldwide crypto trading volumes can easily reach US$10 billion; they hit US$21 billion one day in mid-November.  The first and best-known digital token, Bitcoin, traded US$7 billion in one 24-hour period.

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We even feel the buzz closer to home. When New Zealand had its own digital coins last year, the NZDT (New Zealand digital token), trading reached a peak of $1 million a day. That was before ANZ Bank got nervous and pulled the plug, though its founder, Cryptopia, is looking to relaunch next year.

But investment in cryptocurrencies isn’t for the faint-hearted, Pentney says. Prices don’t track up and down as with a traditional shares or currency; they bounce like a snooker ball on a trampoline.

Bitcoin was worth US$7770 in mid-November 2017, US$19,000 in mid-December, US$12,600 at Christmas, US$17,000 at New Year, US$8500 in February. And so on.

Speculators’ paradise

Then, just when people were beginning to wonder if Bitcoin investment was getting boring – it had been stuck in the US$6300-US$6500 range in mid-November, it went crazy again, dropping 10% in about five minutes.

“Many of the other coins fell more, some up to 20%,” Pentney says, describing the events of November 14. “Plus, they were very volatile. They slumped, then they were shooting upwards and then down, then they crept up again.”

Rumour had it that the markets were spooked by infighting between two key figures in the Bitcoin world, investor Roger Ver and controversial Australian computer scientist Craig Wright.

Pentney says investors who have been involved with cryptocurrencies for a while won’t be concerned by a return to volatility – they’ve been there before. And short sellers will have made a lot of money. “But other people have a lot of money invested, maybe too much. Maybe they’ve borrowed to buy Bitcoin. They’ll be worried.”

Strangely, Pentney predicts some major cryptocurrencies could eventually become stable investments. Some could possibly be used as a store of value for investors, such as gold and silver are now.

“A prudent investor should have a percentage of their assets in a relatively conservative investment. Gold and silver tend to do well at times when the market is uncertain or turbulent. The argument isn’t proven, but Bitcoin may at some stage have the same properties of being a safe haven.”

This article was first published in the December 8, 2018 issue of the New Zealand Listener.